Scandinavian Working Papers in Economics

Test Working Paper Series,
Littletown University, Department of Economics

No 18-2: A small paper

Sven Svensson ()
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Sven Svensson: Department of Economics, Postal: Department of Economics, Littletown University, Littletown

Abstract: We construct a model of strategic behavior in sequential markets which exhibits a persistent forward price premium. On the spot market, producers wield market power while purchasers are price takers. Producers with forward commitments have less incentive to raise prices on the spot market. Purchasers are thus willing to pay a premium to producers for forward contracts. We argue that this type of forward premium is not susceptible to arbitrage by speculators on the forward market, since purchasers prefer forward contracts backed by producers.

Keywords: Arbritrage; Forward pricing

JEL-codes: D43; D47; D62

23 pages, January 30, 2018

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