IDEAS home Printed from https://ideas.repec.org/a/oup/ajagec/v76y1994i2p286-295..html
   My bibliography  Save this article

Multiperiod Production with Forward and Option Markets

Author

Listed:
  • Sergio H. Lence
  • Dermot J. Hayes
  • Yong Sakong

Abstract

Production and hedging in both forward and options markets are analyzed for forward-looking firms that maximize expected utility. In the presence of unbiased forward and options prices, it is shown that such firms will use options as hedging instruments. This result contrasts with the conclusions from studies that assume myopic behavior, and occurs because forward-looking agents care about the effect of future output prices on profits from future production cycles. Simulations support the theoretical results and show how the introduction of an options market influences the optimal forward position.

Suggested Citation

  • Sergio H. Lence & Dermot J. Hayes & Yong Sakong, 1994. "Multiperiod Production with Forward and Option Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 76(2), pages 286-295.
    • Handle: RePEc:oup:ajagec:v:76:y:1994:i:2:p:286-295.
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.2307/1243630
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Yong Sakong & Dermot J. Hayes & Arne Hallam, 1993. "Hedging Production Risk With Options," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 75(2), pages 408-415.
    2. Harvey Lapan & Giancarlo Moschini & Steven D. Hanson, 1991. "Production, Hedging, and Speculative Decisions with Options and Futures Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 73(1), pages 66-74.
    3. Ronald W. Anderson & Jean-Pierre Danthine, 1983. "The Time Pattern of Hedging and the Volatility of Futures Prices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 50(2), pages 249-266.
    4. Larry S. Karp, 1987. "Methods for Selecting the Optimal Dynamic Hedge When Production is Stochastic," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 69(3), pages 647-657.
    5. Losq, Etienne, 1982. "Hedging with price and output uncertainty," Economics Letters, Elsevier, vol. 10(1-2), pages 65-70.
    6. Hey, John D, 1987. "The Dynamic Competitive Firm under Spot Price Uncertainty," The Manchester School of Economic & Social Studies, University of Manchester, vol. 55(1), pages 1-12, March.
    7. Holthausen, Duncan M, 1979. "Hedging and the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 69(5), pages 989-995, December.
    8. Anderson, Ronald W & Danthine, Jean-Pierre, 1980. "Hedging and Joint Production: Theory and Illustrations," Journal of Finance, American Finance Association, vol. 35(2), pages 487-498, May.
    9. Sandmo, Agnar, 1971. "On the Theory of the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 61(1), pages 65-73, March.
    10. Jacob Paroush & Avner Wolf, 1989. "Production and hedging decisions in the presence of basis risk," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 9(6), pages 547-563, December.
    11. Kerkvliet, Joe & Moffett, Michael H., 1991. "The Hedging of an Uncertain Future Foreign Currency Cash Flow," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(4), pages 565-578, December.
    12. Smith, Clifford W. & Stulz, René M., 1985. "The Determinants of Firms' Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(4), pages 391-405, December.
    13. Gershon Feder & Richard E. Just & Andrew Schmitz, 1980. "Futures Markets and the Theory of the Firm under Price Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 94(2), pages 317-328.
    14. Simon Benninga & Rafael Eldor & Itzhak Zilcha, 1984. "The optimal hedge ratio in unbiased futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 4(2), pages 155-159, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Marin Bozic, 2010. "Pricing Options on Commodity Futures: The Role of Weather and Storage," Working Papers 1003, The Institute of Economics, Zagreb.
    2. Broll, Udo & Wahl, Jack E. & Zilcha, Itzhak, 1999. "Hedging exchange rate risk: The multiperiod case," Research in Economics, Elsevier, vol. 53(4), pages 365-380, December.
    3. Jonathan Dark, 2005. "A Critique of Minimum Variance Hedging," Accounting Research Journal, Emerald Group Publishing, vol. 18(1), pages 40-49, June.
    4. Tomek, William G. & Peterson, Hikaru Hanawa, 2000. "Risk Management In Agricultural Markets: A Survey," 2000 Producer Marketing and Risk Management Conference, January 13-14, Orlando, FL 19580, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    5. Battermann, Harald L. & Braulke, Michael & Broll, Udo & Schimmelpfennig, Jorg, 2000. "The preferred hedge instrument," Economics Letters, Elsevier, vol. 66(1), pages 85-91, January.
    6. Lien, Donald & Wong, Kit Pong, 2004. "Optimal bidding and hedging in international markets," Journal of International Money and Finance, Elsevier, vol. 23(5), pages 785-798, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sergio H. Lence & Dermot J. Hayes, 1995. "Optimal Hedging Under Forward‐Looking Behaviour," The Economic Record, The Economic Society of Australia, vol. 71(4), pages 329-342, December.
    2. Nyassoke Titi Gaston Clément & Jules Sadefo-Kamdem & Louis Aimé Fono, 2019. "Dynamic Optimal Hedge Ratio Design when Price and Production are stochastic with Jump," Working Papers hal-02417401, HAL.
    3. Lence, Sergio Horacio, 1991. "Dynamic firm behavior under uncertainty," ISU General Staff Papers 1991010108000010656, Iowa State University, Department of Economics.
    4. Nyassoke Titi Gaston Clément & Sadefo Kamdem Jules & Fono Louis Aimé, 2022. "Dynamic optimal hedge ratio design when price and production are stochastic with jump," Annals of Finance, Springer, vol. 18(3), pages 419-428, September.
    5. Park, Timothy A. & Antonovitz, Frances, 1991. "Econometric Tests Of Firm Decision Making Under Uncertainty: Optimal Output And Hedging Decisions," 1991 Annual Meeting, August 4-7, Manhattan, Kansas 271264, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    6. Harvey Lapan & Giancarlo Moschini & Steven D. Hanson, 1991. "Production, Hedging, and Speculative Decisions with Options and Futures Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 73(1), pages 66-74.
    7. Ricome, Aymeric & Chaib, Karim & Ridier, Aude & Kephaliacos, Charilaos & Carpy-Goulard, Francoise, 2012. "The role of cash crop marketing contracts in the adoption of low-input practices in the presence of risk and income supports," 126th Seminar, June 27-29, 2012, Capri, Italy 126222, European Association of Agricultural Economists.
    8. Andreas Röthig, 2009. "Microeconomic Risk Management and Macroeconomic Stability," Lecture Notes in Economics and Mathematical Systems, Springer, number 978-3-642-01565-6, December.
    9. Vadhindran K. Rao, 2011. "Multiperiod Hedging using Futures: Mean Reversion and the Optimal Hedging Path," JRFM, MDPI, vol. 4(1), pages 1-29, December.
    10. Robison, Lindon J. & Hanson, Steven D., 1995. "Analyzing Firm Response to Risk Using Mean-Variance Models," Staff Paper Series 201207, Michigan State University, Department of Agricultural, Food, and Resource Economics.
    11. Dionne, Georges & Santugini, Marc, 2014. "Entry, imperfect competition, and futures market for the input," International Journal of Industrial Organization, Elsevier, vol. 35(C), pages 70-83.
    12. Korn, Olaf & Merz, Alexander, 2016. "How to hedge if the payment date is uncertain?," CFR Working Papers 07-14 [rev.], University of Cologne, Centre for Financial Research (CFR).
    13. repec:ebl:ecbull:v:7:y:2006:i:1:p:1-8 is not listed on IDEAS
    14. Lien, Donald & Yu, Chia-Feng (Jeffrey), 2017. "Production and hedging with optimism and pessimism under ambiguity," International Review of Economics & Finance, Elsevier, vol. 50(C), pages 122-135.
    15. Lei, Li-Fen, 1992. "Using futures and option contracts to manage price and quantity risk: A case of corn farmers in central Iowa," ISU General Staff Papers 1992010108000011326, Iowa State University, Department of Economics.
    16. Iltae Kim, 2002. "On Hedging Behaviour In The Presence Of Exchange Rate Uncertainty And Random Cost," South African Journal of Economics, Economic Society of South Africa, vol. 70(5), pages 777-788, June.
    17. Akron, Sagi & Benninga, Simon, 2013. "Production and hedging implications of executive compensation schemes," Journal of Corporate Finance, Elsevier, vol. 19(C), pages 119-139.
    18. Kim, Tae-Kyun, 1989. "The factor bias of technical change and technology adoption under uncertainty," ISU General Staff Papers 1989010108000010138, Iowa State University, Department of Economics.
    19. Wong, Kit Pong, 2007. "Operational and financial hedging for exporting firms," International Review of Economics & Finance, Elsevier, vol. 16(4), pages 459-470.
    20. Wong, Kit Pong, 2006. "The effects of abandonment options on operating leverage and forward hedging," International Review of Economics & Finance, Elsevier, vol. 15(1), pages 72-86.
    21. Akron, Sagi, 2019. "The optimal derivative-based corporate hedging strategies under equity-linked managerial compensation," Emerging Markets Review, Elsevier, vol. 41(C).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:ajagec:v:76:y:1994:i:2:p:286-295.. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://edirc.repec.org/data/aaeaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.