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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.

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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Bibliographic 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: 01 Aug 1992
Date of revision:
Publication status: Published in International Economic Review, August 1992, vol. 33 no. 3, pp. 607-618
Handle: RePEc:isu:genres:10043

Contact details of provider:
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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Cited by:
  1. Lapan, Harvey & Moschini, Giancarlo, 1996. "Optimal price policy and the futures markets," Economics Letters, Elsevier, vol. 53(2), pages 175-182, November.
  2. Hennessy, David A., 1998. "Risk Market Innovations and Choice," International Review of Economics & Finance, Elsevier, vol. 7(3), pages 331-341.
  3. Adam, Tim Rene, 2002. "Risk management and the credit risk premium," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 243-269, March.
  4. 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.
  5. 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.
  6. Georges Dionne & Marc Santugini, 2014. "Production Flexibility and Hedging," Cahiers de recherche 1417, CIRPEE.
  7. Ivan Stoykov & Paraskeva Dimitrova, 2003. "Modelling Firm Activity," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 3, pages 3-24.
  8. 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.
  9. 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.
  10. Adam, Tim, 2009. "Capital expenditures, financial constraints, and the use of options," Journal of Financial Economics, Elsevier, vol. 92(2), pages 238-251, May.

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