his article examines the problem of hedging in futures markets when hedgers T and speculators possess different degrees of information about prices. Hedgers who (apriori) are less well informed than speculators have to cope with two levels of risk: a first level, which corresponds to the presence of a probability distribution surrounding the future price on futures markets; and a second level, which corresponds to their incomplete knowledge of that distribution.
In the context of this informational asymmetry, we develop a signaling model in which the basis observed at the beginning of the period leads the hedger to formulate a subjective estimate of the mean and variance of the future price on the futures market. We then use an exponential utility function in conjunction with an adjustment mechanism to develop the optimal hedging strategy for the risk-averse hedger. Our analysis shows, among other things, that the optimal hedging strategy presented in prior work in this field corresponds to a special case of our optimal solution.
Numerous two-market hedging models have been presented to explain the optimal hedging technique that should be adopted in commodity futures markets, so as to avoid the price risk associated with commodity holdings. Writers, following one path, have applied the framework of Keynes (1930) and Hicks (1946) in which the difference between spot and futures prices reflects a risk premium which is regarded as a reward for the risk taking activity of speculators. Following Telser (1958) and This research was funded by a grant from the "Chaire en assurance" at Lava1 University. Earlier versions of this paper were presented at the ORSmIMS 1984 meetings in Dallas, Texas and at the Finance Workshop at Laval University in March 1984. The authors thank those audiences for useful comments and discussion. They would also like to thank George M. McCabe and three anonymous referees of this Journal for helpful suggestions and insights.