Hedging with forwards and puts in complete and incomplete markets
AbstractWe derive general conditions under which forward and/or put unbiasedness occurs and show that restrictions on the probability distribution suffice for simultaneous unbiasedness of forwards and puts, even if consumers are assumed to be risk averse. We examine the optimal production and hedging decisions by a risk-averse producer. If the producer’s state prices are derived from his marginal rates of substitution an unbiased market forward price is overpriced and an unbiased market put price is underpriced. Even in this case the full hedging and separation theorem still holds and, contrary to previous literature, there is a hedging role for puts.
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Bibliographic InfoPaper provided by University of Groningen, Research Institute SOM (Systems, Organisations and Management) in its series Research Report with number 02E53.
Date of creation: 2002
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-01-12 (All new papers)
- NEP-CFN-2003-01-12 (Corporate Finance)
- NEP-FIN-2003-01-12 (Finance)
- NEP-FMK-2003-01-12 (Financial Markets)
- NEP-RMG-2003-01-12 (Risk Management)
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- Nongnuch Tantisantiwong, 2004. "Theoretical moment restrictions of commodity prices," Money Macro and Finance (MMF) Research Group Conference 2004 19, Money Macro and Finance Research Group.
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