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Strategic Trading, Welfare and Prices with Futures Contracts

Hugues Dastarac ()

Working papers from Banque de France

Abstract: Derivatives contracts are designed to improve risk sharing in financial markets, but among them, forwards, futures and swaps often appear redundant with their underlying assets: buying the asset and storing it is equivalent to buying it later. I show that imperfect competition in a dynamic market creates an incompleteness, opening gains from trading futures; but surprisingly, in equilibrium, agents trading these contracts have lower welfare than without futures. To mitigate their price impact, buyers (sellers) of an asset postpone profitable trades, exposing themselves to upward (downward) future spot price movements: buyers (sellers) would like to buy (sell) futures. However, when futures are introduced, traders also want to influence the spot price at futures maturity to increase futures payoff: this leads buyers (sellers) to sell (buy) futures. Moreover, despite the absence of market segmentation that would preclude arbitrage, the futures price can be above or below the spot price.

Keywords: Futures; Imperfect Competition; Inefficiency; Mispricing (search for similar items in EconPapers)
JEL-codes: G10 G13 G15 (search for similar items in EconPapers)
Pages: 82 pages
Date: 2021
New Economics Papers: this item is included in nep-com and nep-mst
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