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Futures Hedging Under Price, Basis and Production Risk

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  • Lapan, Harvey E.
  • Moschini, GianCarlo

Abstract

We consider the hedging problem of a firm that has three sources of risk: price, basis, and yield uncertainty. An exact solution for the optimal futures hesge is derived under the assumption that the three random variables are joint normally distributed and that utility is of the CARA type. Unlike the mean-variance approximation applied in previous research, we show that the optimal hedge does depend on risk attitudes, even when the agent perceives the futures price as being unbiased. The theoretical results are applied empirically to the problem of hedging soybean production in Iowa. The exact solution, relying on CARA and normality, is compared with numerical solutions under lognormal distributions and CRRA utility.

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Bibliographic Info

Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 10041.

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Date of creation: 01 Aug 1994
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Publication status: Published in American Journal of Agricultural Economics, August 1994, vol. 76 no. 3, pp. 465-477
Handle: RePEc:isu:genres:10041

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
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Web page: http://www.econ.iastate.edu
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