Forward Commodity Trading with Private Information

Edward J. Anderson () and Andrew B. Philpott ()
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Edward J. Anderson: University of Sydney Business School, University of Sydney, Sydney, New South Wales 2000, Australia
Andrew B. Philpott: Electric Power Optimization Centre, University of Auckland, Auckland 1010, New Zealand

Operations Research, 2019, vol. 67, issue 1, 58-71

Abstract: We consider the use of forward contracts to reduce risk for firms operating in a spot market. Firms have private information on the distribution of prices in the spot market. We discuss different ways in which firms may agree on a bilateral forward contract: either through direct negotiation or through a broker. We introduce a form of supply-function equilibrium in which two firms each offer a supply function, and the clearing price and quantity for the forward contracts are determined from the intersection. In this context, a firm can use the offer of the other player to augment its own information about the future price.

Keywords: forward contracts; Nash bargaining; supply-function equilibrium; wholesale electricity markets (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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