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


  • Moschini, Giancarlo
  • Lapan, Harvey E


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 also affects the firm's input decisions in general. Copyright 1992 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Moschini, Giancarlo & Lapan, Harvey E, 1992. "Hedging Price Risk with Options and Futures for the Competitive Firm with Production Flexibility," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(3), pages 607-618, August.
  • Handle: RePEc:ier:iecrev:v:33:y:1992:i:3:p:607-18

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    References listed on IDEAS

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    4. Nijman, T.E. & Verbeek, M.J.C.M., 1989. "The nonresponse bias in the analysis of the determinants of total annual expenditures of households based on panel data," Discussion Paper 1989-36, Tilburg University, Center for Economic Research.
    5. Hausman, Jerry A & Wise, David A, 1979. "Attrition Bias in Experimental and Panel Data: The Gary Income Maintenance Experiment," Econometrica, Econometric Society, vol. 47(2), pages 455-473, March.
    6. Charles F. Manski, 1989. "Anatomy of the Selection Problem," Journal of Human Resources, University of Wisconsin Press, vol. 24(3), pages 343-360.
    7. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
    8. Holly, Alberto, 1982. "A Remark on Hausman's Specification Test," Econometrica, Econometric Society, vol. 50(3), pages 749-759, May.
    9. Mizon, Grayham E, 1977. "Inferential Procedures in Nonlinear Models: An Application in a UK Industrial Cross Section Study of Factor Substitution and Returns to Scale," Econometrica, Econometric Society, vol. 45(5), pages 1221-1242, July.
    10. Wansbeek, Tom & Kapteyn, Arie, 1989. "Estimation of the error-components model with incomplete panels," Journal of Econometrics, Elsevier, vol. 41(3), pages 341-361, July.
    11. Baltagi, Badi H., 1985. "Pooling cross-sections with unequal time-series lengths," Economics Letters, Elsevier, vol. 18(2-3), pages 133-136.
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    Cited by:

    1. 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.
    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.
    3. repec:eee:eneeco:v:63:y:2017:i:c:p:348-364 is not listed on IDEAS
    4. Bajo, Emanuele & Barbi, Massimiliano & Romagnoli, Silvia, 2014. "Optimal corporate hedging using options with basis and production risk," The North American Journal of Economics and Finance, Elsevier, vol. 30(C), pages 56-71.
    5. Adam, Tim, 2009. "Capital expenditures, financial constraints, and the use of options," Journal of Financial Economics, Elsevier, vol. 92(2), pages 238-251, May.
    6. Adam, Tim Rene, 2002. "Risk management and the credit risk premium," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 243-269, March.
    7. Georges Dionne & Marc Santugini, 2015. "Production Flexibility and Hedging," Risks, MDPI, Open Access Journal, vol. 3(4), pages 1-10, December.
    8. Hennessy, David A., 1998. "Risk Market Innovations and Choice," International Review of Economics & Finance, Elsevier, vol. 7(3), pages 331-341.
    9. Ivan Stoykov & Paraskeva Dimitrova, 2003. "Modelling Firm Activity," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 3, pages 3-24.
    10. Lapan, Harvey & Moschini, Giancarlo, 1996. "Optimal price policy and the futures markets," Economics Letters, Elsevier, vol. 53(2), pages 175-182, November.
    11. 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.

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