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Forward Commodity Trading with Private Information

Author

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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)

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.

Suggested Citation

  • Edward J. Anderson & Andrew B. Philpott, 2019. "Forward Commodity Trading with Private Information," Operations Research, INFORMS, vol. 67(1), pages 58-71, January.
    • Handle: RePEc:inm:oropre:v:67:y:2019:i:1:p:58-71
    DOI: 10.1287/opre.2018.1777
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    References listed on IDEAS

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