hen the future prices of commodities are known with certainty there is no reason to establish a futures market. Agents can construct a futures position in any commodity by borrowing or lending, since the future value of both the loan and the commodity are known.
Uncertainty introduces two motives for futures trading. First, as Keynes (1930) and Hicks (1946) originally noted, uncertainty may produce a desire to transfer risk. Those with large endowments will want to hedge by taking short positions in the futures market, while those with future requirements will tend to go long. Even if endowments are identical, individuals will still want to trade if they have different risk preferences. Keynes, for instance, claimed that highly risk-averse individuals, the hedgers, would transfer the risk of carrying a commodity to less risk-averse individuals, the speculators.
Under uncertainty, differential information provides the second motive for futures trading. In its original form, as presented by Working (1953), this theory points to the obvious fact that two individuals with different probability assessments regarding the future value of a commodity can both increase their utility ex ante by entering into a futures contract. Modern versions of this theory are more subtle because of Lucas' (1972) observation that in a world with differential information the market price will tend to aggregate information. Grossman (1975Grossman ( , 1977) ) has shown, nonetheless, that as long as the market price does not aggregate all information perfectly, differing beliefs will lead to futures trading.
Presumably, both motives account for the volume of trading that is observed in the market at any point in time. Intuitively, it seems that an "increase in uncertainty" should lead to an increase in both belief trading and hedging. This intuition is refined and supported by the theoretical work of Grossman (1975Grossman ( , 1977)).