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Monopoly power limits hedging

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  • Muermann, Alexander
  • Shore, Stephen H.
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    Abstract

    When a spot market monopolist participates in a derivatives market, she has an incentive to deviate from the spot market monopoly optimum to make her derivatives market position more profitable. When contracts can only be written contingent on the spot price, a risk-averse monopolist chooses to participate in the derivatives market to hedge her risk, and she reduces expected profits by doing so. However, eliminating all risk is impossible. These results are independent of the shape of the demand function, the distribution of demand shocks, the nature of preferences or the set of derivatives contracts. --

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    Bibliographic Info

    Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2008/37.

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    Date of creation: 2008
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    Handle: RePEc:zbw:cfswop:200837

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    Keywords: Spot Market Power; Derivates Market; Hedging;

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