This paper deals with the producer's optimal use of commodity futures in hedging. The framework for analysis is an intertemporal consumption and investment model. The producer makes his production decisions at the beginning of the period and realizes his return at the end of the time interval. During the period, he faces both price and output uncertainties. In applying stochastic dynamic programming methods, this paper shows the effect of these risks on his consumption behavior. Further, the paper investigates his optimal hedging positions in the futures market over time and his optimal production decisions. Finally, implications of these results on the futures markets are discussed.

Thomas S. Y. Ho, Anthony Saunders, Fixed Rate Loan Commitments, Take-Down Risk, and the Dynamics of Hedging with Futures, The Journal of Financial and Quantitative Analysis, Vol. 18, No. 4 (Dec., 1983), pp. 499-516

This paper has developed a model of bank margins or spreads in which the bank is viewed as a risk-averse dealer. It was demonstrated that an interest spread or margin would always exist, and that this was the result of transactions uncertainty faced by the bank. Moreover, it was shown that this pure spread depended on four factors: the degree of managerial risk aversion; the size of transactions undertaken by the bank; bank market structure; and the variance of interest rates. The model implied that liability and asset structures had to be analyzed together since they were directly interrelated through transactions uncertainty. It was shown that because of this transactions uncertainty, hedging behavior was perfectly rational within an expected utility maximizing framework. Extending the model from a structure with one kind of loan and deposit to loans and deposits with many maturities should lead to further interesting insights into margin determination especially as “portfolio” effects may become apparent.

This paper demonstrates that valuable insights into the determination of Federal funds rates can be gained through modeling the micro‐decisions of market participants. Fed fund demand functions are derived for different bank valuation functions and several implications are discussed. Specifically, it is: (i) possible to rationalize the observation that large banks are net purchasers and small banks net sellers of Fed funds; (ii) to explain the positive spread of Fed funds rates over other short‐term money market rates; and (iii) to link the size of this spread to the Federal Reserve's underlying monetary policy strategy.

This paper, utilizing dealer's “trading book” information, presents some empirical evidence supporting the validity of a dealer pricing model. It shows that much of the transaction prices variation may be explained by the specialist's optimal determination of his bid and ask quotes. Furthermore, it demonstrates that the dealer's bid‐ask spread is an important explanatory variable in the observed transaction return. Finally, it indicates that the dealer's inventory level may affect his quotes and thus the transaction prices and order arrivals. The paper provides insights into the relationship between transaction prices and equilibrium prices, which will permit more extensive use of transaction data in empirical investigations. It also provides a better understanding of optimal dealer pricing strategies, suggesting that the proposed empirical model may be used to evaluate a dealer's trading performance.

The behavior of competing dealers in securities markets is analyzed. Securities are characterized by stochastic returns and stochastic transactions. Reservation bid and ask prices of dealers are derived under alternative assumptions about the degree to which transactions are correlated across stocks at a given time and over time in a given stock. The conditions for interdealer trading are specified, and the equilibrium distribution of dealer inventories and the equilibrium market spread are derived. Implications for the structure of securities markets are examined.

The behavior of competing dealers in securities markets is analyzed. Securities are characterized by stochastic returns and stochastic transactions. Reservation bid and ask prices of dealers are derived under alternative assumptions about the degree to which transactions are correlated across stocks at a given time and over time in a given stock. The conditions for interdealer trading are specified, and the equilibrium distribution of dealer inventories and the equilibrium market spread are derived. Implications for the structure of securities markets are examined.