Managing Resource Price Risk: Futures Markets, Sustainability and Efficiency

Posted: 10 Oct 1998

See all articles by Erwin H. Bulte

Erwin H. Bulte

Tilburg University - Department of Economics; Wageningen University

Joost M. E. Pennings

Maastricht University; Wageningen UR; University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics

Willem J.M. Heijman

Wageningen Agricultural University

Abstract

Markets for resource futures contracts and cash forward contracts experience a rapid growth. According to theory, this should result in more efficient resource depletion, meaning that deviations from the Hotelling price path should decline. Using a very simple model, we show that empirical support for this claim appears to be small. The implications for sustainability are briefly discussed, and a condition is derived that links the issues of efficiency and sustainability. Whether this condition is satisfied will depend on certain characteristics of the resource stock under consideration. In contrast to these (potential) social benefits, reduced price fluctuations bring on a cost for risk neutral resource owners, and resource owners that have a low level of risk aversion. Their expected revenues and utility will decline, which may be considered a negative externality of applying resource price risk management instruments.

JEL Classification: G13

Suggested Citation

Bulte, Erwin H. and Pennings, Joost M. E. and Heijman, Willem J.M., Managing Resource Price Risk: Futures Markets, Sustainability and Efficiency. Available at SSRN: https://ssrn.com/abstract=6459

Erwin H. Bulte

Tilburg University - Department of Economics ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 9111 (Phone)

Wageningen University

Hollandseweg 1
6706 KN
Wageningen
Netherlands

Joost M. E. Pennings (Contact Author)

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands

HOME PAGE: http://marketing-finance.nl/cv/cvpennings.pdf

Wageningen UR ( email )

Hollandseweg 1
Wageningen, 6706KN
Netherlands

HOME PAGE: http://marketing-finance.nl/cv/cvpennings.pdf

University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics

1301 W. Gregory Drive
326 Mumford Hall MC-710
Urbana, IL 61801
United States
217-244-1284 (Phone)
217-333-5538 (Fax)

HOME PAGE: http://marketing-finance.nl/cv/cvpennings.pdf

Willem J.M. Heijman

Wageningen Agricultural University ( email )

Hollandseweg 1
6706 KN
Wageningen
Netherlands

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