The Derived Demand with Hedging Cost Uncertainty in the Futures Markets: Note and Extensions
AbstractParoush and Wolf (1992) investigated a perfectly competitive firm which faces input price uncertainty in one input of its two-input production function. The main purpose of their study was to determine the impact of the technological relationship on the derived demand when the input is hedged in a forward or futures market. They found that the partial cross derivatives of the production function and the market structure of the futures price (upward or downward bias) affect the derived demand. This note provides two extensions. First, it generalises Paroush and Wolf's theorem by using general utility function (Theorem 1). Second, it adds a new theorem (Theorem 2) that shows the impact of adding basis risk on the optimal hedging. This theorem is equally important since hedging is a decision variable. Below is a description of Paroush and Wolf's model.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Centre for Research into Industry, Enterprise, Finance and the Firm in its series CRIEFF Discussion Papers with number 0210.
Date of creation: Feb 2002
Date of revision:
Contact details of provider:
Postal: School of Economics and Finance, University of St. Andrews, Fife KY16 9AL
Phone: 01334 462420
Fax: 01334 462438
Web page: http://crieff.wordpress.com/
More information through EDIRC
Cost uncertainty; forward market; futures market; hedging; input price uncertainty;
Find related papers by JEL classification:
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
This paper has been announced in the following NEP Reports:
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Moawia Alghalith, 2008. "Hedging and production decisions under uncertainty: A survey," Papers 0810.0917, arXiv.org.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bram Boskamp).
If references are entirely missing, you can add them using this form.