The (S,s) policy is an optimal trading strategy in a class of commodity price speculation problems

Abstract

This paper introduces a model of commodity price speculation and proves that the optimal trading strategy is of the (S,s) form when a no expected loss condition holds. A strong form of this condition is that the retail price charged to consumers at time t exceeds the expected wholesale price of the commodity at time t+1, i.e. pr≥ β E{pt+11|p t,xt} where β ε(0,1) is the speculator's discount factor. © Springer-Verlag 2006.