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Multiperiod Production with Forward and Options Markets

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Author Info
Lence, Sergio H.
Sakong, Yong
Hayes, Dermot J.

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Abstract

Production and hedging in both forward and options markets are analyzed for forward-looking firms that maximize expected utility. In the presence of unbiased forward and options prices, it is shown that such firms will use options as hedging instruments. This result contrasts with the conclusions from studies that assume myopic behavior, and occurs because forward-looking agents care about the effect of future output prices on profits from future production cycles. Simulations support the theoretical results and show how the introduction of an options market influences the optimal forward position.

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File URL: http://www.card.iastate.edu/publications/DBS/PDFFiles/93wp112.pdf
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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 634.

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Date of creation: 30 Sep 1993
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Publication status: Published in American Journal of Agricultural Economics, May 1994, Vol. 76, No. 2, pp. 286-95.
Handle: RePEc:isu:genres:634

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
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Web page: http://www.econ.iastate.edu
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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Anderson, Ronald W & Danthine, Jean-Pierre, 1980. " Hedging and Joint Production: Theory and Illustrations," Journal of Finance, American Finance Association, vol. 35(2), pages 487-98, May. [Downloadable!] (restricted)
  2. Kerkvliet, Joe & Moffett, Michael H., 1991. "The Hedging of an Uncertain Future Foreign Currency Cash Flow," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(04), pages 565-578, December. [Downloadable!]
  3. Smith, Clifford W. & Stulz, Ren? M., 1985. "The Determinants of Firms' Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(04), pages 391-405, December. [Downloadable!]
  4. Anderson, Ronald W & Danthine, Jean-Pierre, 1983. "The Time Pattern of Hedging and the Volatility of Futures Prices," Review of Economic Studies, Blackwell Publishing, vol. 50(2), pages 249-66, April. [Downloadable!] (restricted)
  5. Karp, Larry S, 1986. "Methods for selecting the optimal dynamic hedge when production is stochastic," CUDARE Working Paper Series 405, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
  6. Hey, John D, 1987. "The Dynamic Competitive Firm under Spot Price Uncertainty," The Manchester School of Economic & Social Studies, Blackwell Publishing, vol. 55(1), pages 1-12, March.
  7. Feder, Gershon & Just, Richard E & Schmitz, Andrew, 1980. "Futures Markets and the Theory of the Firm under Price Uncertainty," The Quarterly Journal of Economics, MIT Press, vol. 94(2), pages 317-28, March. [Downloadable!] (restricted)
  8. Holthausen, Duncan M, 1979. "Hedging and the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 69(5), pages 989-95, December. [Downloadable!] (restricted)
  9. Sakong, Yong & Hayes, Dermot J. & Hallam, Arne, 1993. "Hedging Production Risk with Options," Staff General Research Papers 559, Iowa State University, Department of Economics.
  10. Lapan, Harvey E. & Moschini, Giancarlo & Hanson, Steve, 2003. "Production Hedging and Speculative Decisions with Options and Future Markets," Staff General Research Papers 10810, Iowa State University, Department of Economics.
  11. Losq, Etienne, 1982. "Hedging with price and output uncertainty," Economics Letters, Elsevier, vol. 10(1-2), pages 65-70. [Downloadable!] (restricted)
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  1. Tomek, William G. & Peterson, Hikaru Hanawa, 2000. "Risk Management In Agricultural Markets: A Survey," 2000 Producer marketing and Risk Management Conference, January 13-14, Orlando, FL 19580, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  2. 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!]
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