| Abstract: |
Derivatives contracts are designed to improve risk sharing in financial
markets, but among them, forwards, futures and swaps often appear redundant
with their underlying assets: buying the asset and storing it is equivalent to
buying it later. I show that imperfect competition in a dynamic market creates
an incompleteness, opening gains from trading futures; but surprisingly, in
equilibrium, agents trading these contracts have lower welfare than without
futures. To mitigate their price impact, buyers (sellers) of an asset postpone
profitable trades, exposing themselves to upward (downward) future spot price
movements: buyers (sellers) would like to buy (sell) futures. However, when
futures are introduced, traders also want to influence the spot price at
futures maturity to increase futures payoff: this leads buyers (sellers) to
sell (buy) futures. Moreover, despite the absence of market segmentation that
would preclude arbitrage, the futures price can be above or below the spot
price. |