Rothschild Lecture: What do we agree on when we disagree? Forward contracts with private forecasts – Eddie Anderson (University of Sydney)

April 29, 2019 @ 4:00 pm – 5:00 pm
Seminar Room 1
Newton Institute

Forward contracts are used for hedging purposes when firms operate in a spot market. What will happen when firms have different views on the future distribution of prices and are risk averse? We discuss different ways in which two firms may agree on a bilateral forward contract: either through direct negotiation using the ideas of a Nash bargaining solution, or through a broker. We discuss a type of equilibrium in which each firm offers a supply function linking quantities and prices, and the clearing price and quantity for the forward contracts are determined from the intersection. Each firm may also be able to use the offer of the other firm to augment its own information about the future price.