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The Theory of Hedging and Speculation in Commodity Futures

In: The Economics of Futures Trading

Author

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  • Leland L. Johnson

Abstract

Although significant contributions have appeared in the literature in recent years, the present day theory of hedging and speculation appears to account inadequately for certain market practices. In particular, the motivation of the trader who undertakes hedging activities, the role that hedging plays in his over-all market operations, and the distinction between a trader who hedges and one who speculates have given rise to difficulties in the literature. My purposes here are (1) to outline briefly the purposes and mechanics of a commodity futures market, (2) to discuss and appraise the theory of hedging and speculation as it exists today, (3) to present a reformulated concept of hedging, and (4) to construct a model that may both assist in clarifying the concepts of hedging and speculation and contribute to a better understanding of certain market phenomena.

Suggested Citation

  • Leland L. Johnson, 1976. "The Theory of Hedging and Speculation in Commodity Futures," Palgrave Macmillan Books, in: The Economics of Futures Trading, chapter 3, pages 83-99, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-349-02693-7_4
    DOI: 10.1007/978-1-349-02693-7_4
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    Cited by:

    1. Consuela-Elena Popescu & Georgiana Vrinceanu & Alexandra Horobet & Lucian Belascu, 2020. "Managing Exchange Rate Risk with Derivatives: An Application of the Hedge Ratio," Business & Management Compass, University of Economics Varna, issue 3, pages 316-327.
    2. Zhipeng, Yan & Shenghong, Li, 2018. "Hedge ratio on Markov regime-switching diagonal Bekk–Garch model," Finance Research Letters, Elsevier, vol. 24(C), pages 49-55.
    3. Cao, Min & Conlon, Thomas, 2023. "Composite jet fuel cross-hedging," Journal of Commodity Markets, Elsevier, vol. 30(C).
    4. Yu, Xing & Li, Yanyan & Lu, Junli & Shen, Xilin, 2023. "Futures hedging in crude oil markets: A trade-off between risk and return," Resources Policy, Elsevier, vol. 80(C).
    5. Corbet, Shaen & Hou, Yang (Greg) & Hu, Yang & Oxley, Les, 2022. "The influence of the COVID-19 pandemic on the hedging functionality of Chinese financial markets," Research in International Business and Finance, Elsevier, vol. 59(C).
    6. Weiping Li & Wenwen Liu, 2021. "Investor sentiment‐styled index in index futures market," Review of Financial Economics, John Wiley & Sons, vol. 39(1), pages 51-72, January.
    7. Hao Chen & Zhixin Liu & Yinpeng Zhang & You Wu, 2020. "The Linkages of Carbon Spot-Futures: Evidence from EU-ETS in the Third Phase," Sustainability, MDPI, vol. 12(6), pages 1-18, March.

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