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Futures trading, risk reduction and price stabilization (Inglês)

This paper concludes that futures markets offer better insurance to producers than price stabilization schemes except when the producer has a very low correlation between his output and the world price. In this case, however, a price guarantee scheme operated by a domestic Marketing Board offers such a small improvement in income insurance that such benefits will almost certainly be offset by costs of operating such a scheme. Although government intervention seems unattractive for small price taking countries, it will be attractive to large producers, since this intervention can take the form of restricting supply to increase the spot price, and of manipulating the futures market. Large producers benefit from making the futures market less attractive to small producers and, therefore, increasing their risk and reducing supply. The large producer may also find it attractive to manipulate the futures market in a predictable way to increase his profits. Ths paper shows that if all producers face pure demand risk, then large commodity producers have no special reason other than financial size for speculating in the futures market; but if all producers face correlated supply risk, then the large producer benefits from manipulating the futures market.




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