The Simultaneous Determination of Spot and Futures Pries in a Simple Model with Production Risk

Britto, Ronald

doi:10.2307/1885530

Cited by 24 publications

(16 citation statements)

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“…Then the regression coefficient is estimated from a linear regression across the states of nature. Rolfo [28], Stiglitz [32], Britto [8], and Hirshleifer [20] have examined the problem of hedging uncertain production and hedging in macro-market frameworks.…”

Section: Introductionmentioning

confidence: 99%

Treasury Management Model with Foreign Exchange Exposure

Volosov

Mitra

Spagnolo

et al. 2005

Comput Optim Applic

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In this paper we formulate a model for foreign exchange exposure management and (international) cash management taking into consideration random fluctuations of exchange rates. A vector error correction model (VECM) is used to predict the random behaviour of the forward as well as spot rates connecting dollar and sterling. A two-stage stochastic programming (TWOSP) decision model is formulated using these random parameter values. This model computes currency hedging strategies, which provide rolling decisions of how much forward contracts should be bought and how much should be liquidated.\ud \ud The model decisions are investigated through ex post simulation and backtesting in which value at risk (VaR) for alternative decisions are computed. The investigation (a) shows that there is a considerable improvement to “spot only” strategy, (b) provides insight into how these decisions are made and (c) also validates the performance of this mode

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Section: Introductionmentioning

confidence: 99%

Treasury Management Model with Foreign Exchange Exposure

Volosov

Mitra

Spagnolo

et al. 2005

Comput Optim Applic

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“…The analysis of futures trade has made a natural progression from partial equilibrium approaches (for example, McKinnon, 1967 andFeder, Just and Schmitz, 1982) to general equilibrium (for example, Britto, 1984). Partial equilibrium approaches have enabled us to better understand the behaviour of individual agents who face ®xed distributions of price and out put uncertainty.…”

Section: Introductionmentioning

confidence: 99%

“…

The general equilibrium model of Britto (1984) is criticised. In particular, it is shown that allowing consumers to trade on the futures market leads to more complicated results than necessary.

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confidence: 99%

“…Partial equilibrium approaches have enabled us to better understand the behaviour of individual agents who face ®xed distributions of price and out put uncertainty. The key contribution of Britto (1984) was to model futures trade in a general equilibrium model with production risk, and thus discover the determinants of futures trade, and spot and futures prices. Among others, an important technical achievement of this paper was to develop the idea of a rational expectations equilibrium distribution of spot price.…”

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Separating the Roles of Speculators and Consumers: a Model of Futures Trade

Pitchford

1998

Australian Economic Papers

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The general equilibrium model of Britto (1984) is criticised. In particular, it is shown that allowing consumers to trade on the futures market leads to more complicated results than necessary. If consumers do not trade futures, and only producers and speculators do, results are greatly simpli®ed. Consumer risk parameters, and parameters of producers production function are irrelevant. The differential between the futures price and the expected spot price, and the direction of futures trade is shown to depend in a straightforward way on the price elasticity of demand for the product on the spot market. I. I n t ro d u c t i o nThe analysis of futures trade has made a natural progression from partial equilibrium approaches (for example, McKinnon, 1967 andFeder, Just and Schmitz, 1982) to general equilibrium (for example, Britto, 1984). Partial equilibrium approaches have enabled us to better understand the behaviour of individual agents who face ®xed distributions of price and out put uncertainty. The key contribution of Britto (1984) was to model futures trade in a general equilibrium model with production risk, and thus discover the determinants of futures trade, and spot and futures prices. Among others, an important technical achievement of this paper was to develop the idea of a rational expectations equilibrium distribution of spot price. However, like traditional models of general equilibrium it was assumed that if a market exists, then it is costless for all agents in the economy to participate in that market. This paper is intended as a criticism of that assumption. In particular the focus is on Britto's assumption that consumers trade on the futures market. In practice, most consumers have nothing to do with futures trade. 1 Consistent with earlier literature (for example, Hirschleifer, 1988(for example, Hirschleifer, , 1990 which assume some level of transactions costs, I assume that consumers face prohibitive costs of participating in the futures market, through a lack of specialist knowledge. The speculative role consumers may have taken in Britto's general equilibrium model, is ful®lled in the model of this paper by separate, risk averse futures market speculators. In practice, speculators are likely to be very small number relative to consumers, and thus have negligible consumption. To capture this, I assume

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“…Finally, one of Britto's (1984) sufficient conditions for normal backwardation (contango) is that the price elasticity of the consumers' demand is less (greater) than or equal to unity. ' I The price inelastic demand by consumers is one of his sufficient conditions for normal backwardation.…”

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confidence: 99%