Monopoly Power Limits Hedging∗

When a spot market monopolist participates in a derivatives market, she has an incentive to deviate from the spot market monopoly optimum to make her derivatives market position more profitable. When contracts can only be written contingent on the spot price, a risk-averse monopolist chooses to participate in the derivatives market to hedge her risk, and she reduces expected profits by doing so. However, eliminating all risk is impossible. These results are independent of the shape of the demand function, the distribution of demand shocks, the nature of preferences, or the set of derivatives contracts. JEL Classification D42, G32 Keywords spot market power, derivatives market, hedging ∗This note was written by Muermann and Shore inspired by an idea initially considered by Shore and Glen Taksler in the earlier paper, “Why don’t oil producers perfectly risk-share? ” We thank Glen Taksler for his insights. W