I am indebted for helpful comments on earlier versions of this paper to Akira Takayama and Gerhard Tintner. Valuable suggestions concerning style and substance have been made by William A. Brock, Bryan Ellickson and Gilles Paquet. Since some of the issues raised in the recent literature have been-and still are-highly controversial, I must strongly emphasize that all responsibility for the vietvs expressed and the interpretations ogered rests with me alone.

This paper deals with properties of a rational expectations equilibrium when there is futures trading. A simple two-good model is analyzed, where one of the goods is produced subject to production risk. Although the futures market provides insurance against price risk to producers, it is income risk that concerns them. Whether they hedge in equilibrium is shown to depend on the price and income elasticity of demand for their output as well as on the degree to which consumers—the other party in the futures transaction-—are risk-averse.