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Monopoly power limits hedging

Author

Listed:
  • Muermann, Alexander
  • Shore, Stephen H.

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.

Suggested Citation

  • Muermann, Alexander & Shore, Stephen H., 2008. "Monopoly power limits hedging," CFS Working Paper Series 2008/37, Center for Financial Studies (CFS).
  • Handle: RePEc:zbw:cfswop:200837
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    File URL: https://www.econstor.eu/bitstream/10419/43246/1/599233184.pdf
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    More about this item

    Keywords

    Spot Market Power; Derivates Market; Hedging;

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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