Futures Markets and Commodity Options : Hedging and Optimality in Incomplete Markets

This paper examines the allocational roles of futures markets and commodity options in multi-good and multi-period economies. In a continuous-time model with time-additive utilities and homogeneous beliefs, trading in "unconditional" futures contracts, the market portfolio and a riskless asset gives any Pareto-optimal allocation. Individuals' optimal holdings of futures contracts in the continuous-time model are related to their consumption bundles and to their risk tolerances. It is shown that both hedging and "reverse hedging" behavior are possible. In the general model with discrete trading, options on portfolios of commodity options are shown to permit any unconstrained Pareto-optimal allocation