The value of commodity purchase contracts with limited price risk. (equilibrium market valuation of limited price risk commodity purchase contracts)(includes appendix)

From: The Energy Journal | Date: July 1, 1991| Author: | Copyright information

This paper describes and demonstrates the equilibrium market valuation of commodity purchase contracts with price ceilings or price floors or both. These contracts, which we call "limited price risk" contracts, are significantly easier for buyers and sellers to agree upon than fixed price contracts when price uncertainty is high and buyers and sellers have inconsistent price expectations. Analysis of an actual natural gas contract, as well as the existence of many brokers promoting limited price risk gas contracts, suggest that these contracts may be priced inefficiently in ...

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