Dynamic Trading, Imperfect Competition and Forward Contracts

41 Pages Posted: 2 Dec 2019

See all articles by Hugues Dastarac

Hugues Dastarac

Toulouse School of Economics; Banque de France

Date Written: November 15, 2019

Abstract

I provide a model in which forward-like contracts are traded in equilibrium because of imperfect competition. Risk averse traders have successive opportunities to trade a risky asset: with imperfect competition sellers slice their order in small pieces to realize a higher average selling price, and similarly for buyers who want a low average purchase price. If exogenous customers are expected to trade later an unknown quantity independent from the asset value, this creates uncertainty for future transaction prices: buyers and sellers are sensitive to this risk in opposite ways, which creates gains from trading this risk. Abstract contracts indexed on the customer's quantity traded, resembling forwards or futures because equilibrium is linear in this quantity, are traded in imperfectly competitive equilibrium. Sellers keep the asset for longer, and sell forwards, implying a large balance sheet.

Keywords: Dynamic trading, Imperfect Competition, Derivatives

JEL Classification: G12, G13

Suggested Citation

Dastarac, Hugues, Dynamic Trading, Imperfect Competition and Forward Contracts (November 15, 2019). Available at SSRN: https://ssrn.com/abstract=3488037

Hugues Dastarac (Contact Author)

Toulouse School of Economics ( email )

Toulouse
France

Banque de France ( email )

Paris
France

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