Competitive Forward and Spot Trading Under Yield Uncertainty
By Lusheng Shao, Faculty of Business and Economics, The University of Melbourne, Australia, lusheng.shao@unimelb.edu.au | Derui Wang, School of Management, Fudan University, China, drwang19@fudan.edu.cn | Xiaole Wu, School of Management, Fudan University, China, wuxiaole@fudan.edu.cn
Abstract
Agricultural producers face significant yield uncertainty which can cause unpredictable outputs and volatile prices of agricultural commodities. They usually trade those commodities not only in a spot market but also in a forward market to manage price uncertainty. In this section, we develop a game theoretical model to study competing firms’ production decisions in the planting season and trading behaviors in the forward and spot markets. The model also allows us to examine the impact of yield uncertainty and the existence of the forward market on the equilibrium outcomes. We find some counterintuitive results that an increase in yield risk may increase firms’ equilibrium profits and decrease the spot price volatility. A comparison between the models with and without a forward market reveals that the firms’ profits decrease but the spot price volatility increases when there is a forward market. Finally we show that a higher yield risk mitigates the role of the forward market but a higher yield correlation enhances it.
Frontiers in Supply Chain Finance and Risk Management
This monograph contains eight thought-leading contributions on various topics related to supply chain finance and risk management: “Disruption Mitigation and Pricing Flexibility” by Oben Ceryan and Florian Lücker. “Optimal Newsvendor IRM with Downside Risk” by Paolo Guiotto and Andrea Roncoroni. “Competitive Forward and Spot Trading Under Yield Uncertainty” by Lusheng Shao, Derui Wang, and Xiaole Wu. “The Impact of Commodity Price Uncertainty on the Economic Value of Waste-to-Energy Conversion in Agricultural Processing” by Bin Li, Onur Boyabatlı, and Buket Avcı. “Corporate Renewable Procurement” by Selvaprabu Nadarajah. “Blockchain-Based Digital Payment Obligations for Trade Finance” by Jing Hou, Burak Kazaz, and Fasheng Xu. “Long-term Service Agreement in Power Systems” by Panos Kouvelis, Hirofumi Matsuo, Yixuan Xiao, and Quan Yuan. “The Bullwhip Effect in Servicized Manufacturers” by Jiang Shenyang, Jiang Zhibin, Niu Yimeng, and Wu Jing.
Companion
Foundations and Trends® in Technology, Information and Operations Management, Volume 16, Issue 3-4 Special Issue: Frontiers in Supply Chain Finance and Risk Management
See the other articles that are also part of this special issue.