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Methods for Selecting the Optimal Dynamic Hedge When Production is Stochastic

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  • Larry S. Karp

Abstract

A dynamic hedging problem with stochastic production is formulated and solved. The optimal feedback rules recognize that future hedges will be chosen optimally based on the most current information. The resulting distribution of revenue is analyzed numerically. This information enables the analyst to select the risk aversion parameter that results in the preferred distribution of revenue.

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  • Larry S. Karp, 1987. "Methods for Selecting the Optimal Dynamic Hedge When Production is Stochastic," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 69(3), pages 647-657.
  • Handle: RePEc:oup:ajagec:v:69:y:1987:i:3:p:647-657.
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    File URL: http://hdl.handle.net/10.2307/1241699
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    References listed on IDEAS

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    1. Ronald I. McKinnon, 1967. "Futures Markets, Buffer Stocks, and Income Stability for Primary Producers," Journal of Political Economy, University of Chicago Press, vol. 75, pages 844-844.
    2. Marcus, Alan J & Modest, David M, 1984. "Futures Markets and Production Decisions," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 409-426, June.
    3. Just, Richard E. & Pope, Rulon D., 1978. "Stochastic specification of production functions and economic implications," Journal of Econometrics, Elsevier, vol. 7(1), pages 67-86, February.
    4. Cox, John C. & Ingersoll, Jonathan Jr. & Ross, Stephen A., 1981. "The relation between forward prices and futures prices," Journal of Financial Economics, Elsevier, vol. 9(4), pages 321-346, December.
    5. Gershon Feder & Richard E. Just & Andrew Schmitz, 1980. "Futures Markets and the Theory of the Firm under Price Uncertainty," The Quarterly Journal of Economics, Oxford University Press, vol. 94(2), pages 317-328.
    6. Danthine, Jean-Pierre, 1978. "Information, futures prices, and stabilizing speculation," Journal of Economic Theory, Elsevier, vol. 17(1), pages 79-98, February.
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    Cited by:

    1. Sergio H. Lence & Dermot J. Hayes & Yong Sakong, 1994. "Multiperiod Production with Forward and Option Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 76(2), pages 286-295.
    2. Kim, Tae-Kyun, 1989. "The factor bias of technical change and technology adoption under uncertainty," ISU General Staff Papers 1989010108000010138, Iowa State University, Department of Economics.
    3. Monson, Steven J., 1991. "Accounting for yield risk in preharvest commodity pricing decisions," ISU General Staff Papers 1991010108000018169, Iowa State University, Department of Economics.

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