Hedging Price Risk with Options and Futures for the Competitive Firm with Production Flexibility
AbstractWhen some input decisions can be made after price is realized, separation between production and hedging decisions still holds only under limited circumstances. Under the assumption of a restricted profit function that is quadratic in price, the optimal futures hedge of a risk averse firm equals expected output and a short straddle position is desirable assuming that futures and options prices are unbiased. In this case the use of options not only raises expected utility by reducing income risk, but in general also affects the firm input decisions.
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Bibliographic InfoPaper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 10043.
Date of creation: 01 Aug 1992
Date of revision:
Publication status: Published in International Economic Review, August 1992, vol. 33 no. 3, pp. 607-618
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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
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Fax: +1 515.294.0221
Web page: http://www.econ.iastate.edu
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Other versions of this item:
- Moschini, Giancarlo & Lapan, Harvey E, 1992. "Hedging Price Risk with Options and Futures for the Competitive Firm with Production Flexibility," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(3), pages 607-18, August.
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- Frank Lehrbass, 1994. "Optimal hedging with currency forwards, calls, and calls on forwards for the competitive exporting firm facing exchange rate uncertainty," Journal of Economics, Springer, vol. 59(1), pages 51-70, February.
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