Hedging Role of Options and Futures Under Joint Price, Basis and Production Risk, The
AbstractThis paper analyzes the optimal production and hedging decisions for firms facing futures price, basis and production risk, assuming futures and options can be used. Using CARA (constant absolute risk aversion) utility and normal distributions, we derive an exact solution and show that joint production and price risk lead to a hedging role for options. Risk averse firms that can use each hedging instrument will generally have higher (expected) output. Using Iowa data for soybeans, the parameters of the joint distribution of future prices, cash prices and yields are estimated and the results are used to approximate optimal hedging decisions for soybean producers.
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Bibliographic InfoPaper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 5137.
Date of creation: 01 Nov 1995
Date of revision:
Publication status: Published in International Economic Review, November 1995, vol. 36 no. 4, pp. 1025-1049
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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
Web page: http://www.econ.iastate.edu
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