Abstract
Why do traders trade forward and future contracts on assets they could buy or sell directly? I provide an equilibrium model in which this can occur both for hedging, and for manipulation. By delaying trade to mitigate price impact, buyers (sellers) face the risk that the price unexpectedly increases (decreases) due to a supply shock. Futures with maturity shorter than traders' horizon would allow them to share this risk. However, once futures are introduced, traders also want to manipulate futures payoff: futures buyers want to buy the asset at futures maturity to raise the spot price, and conversely for sellers. Trading patterns are opposite futures are used for hedging or for manipulation: with hedging, spot sellers (buyers) also sell (buy) futures and hold inventory for longer, while with manipulation, spot sellers (buyers) buy (sell) futures and liquidate inventory more quickly. In equilibrium, manipulation dominates, and at least for some parameter values, futures decrease welfare.
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