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Hedging Price Risk with Options and Futures for the Competitive Firm with Production Flexibility

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Author Info
Moschini, Giancarlo
Lapan, Harvey E.

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Abstract

When 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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Publisher Info
Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 10043.

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Date of creation: 20 Sep 2002
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Publication status: Published in International Economic Review, August 1992, Vol. 33, No. 3, pp. 607-618.
Handle: RePEc:isu:genres:10043

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Find related papers by JEL classification:
C6 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming
D2 - Microeconomics - - Production and Organizations
D8 - Microeconomics - - Information, Knowledge, and Uncertainty
Q1 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture

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  1. Axel F. A. Adam-Müller & Kit Pong Wong, 2002. "Restricted Export Flexibility and Risk Management with Options and Futures," CoFE Discussion Paper 02-07, Center of Finance and Econometrics, University of Konstanz. [Downloadable!]
  2. 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. [Downloadable!] (restricted)
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