Abstract: This study examines how ambiguity affects hedging behaviour in crude oil futures markets. I quantify ambiguity by examining variations in uncertain probabilities and identify the effect of an ambiguity shock on hedging behaviour using an instrument variable approach. The impact of ambiguity contrasts with the impact of risk, while both are equally important in terms of economic and statistical significance. Crucially, the analysis reveals, heterogeneity across different hedger sub-categories: Swap dealers react averse to ambiguity shocks and increase hedging demand whereas the activity of commodity producers is reduced. The findings in this paper support classical hedging theories in commodity markets, indicating a rise in hedging activity in uncertain conditions.

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Abstract: Commodity options enhance information flow and risk management in futures markets. This paper investigates the impact of options trading on price volatility and hedging effectiveness in grain futures markets by analyzing the 1936 ban on commodity options trading in the United States. Utilizing newly collected data for wheat and corn futures from Chicago and London (1934-1939), we employ a difference-indifferences approach to compare treated (Chicago) and control (London) markets. Our findings show that active options trading is associated with reduced price volatility and improved hedging effectiveness in futures markets. Following the 1936 ban, Chicago futures experienced a significant but temporary shortterm increase in volatility and a decline in hedging effectiveness, highlighting the essential role of options trading in stabilizing futures markets and facilitating efficient information transmission. These results offer important insights for regulatory policies governing derivative markets.

Available at SSRN