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Hedging with Commodity Options When Price Distributions are Skewed

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  • James Vercammen

Abstract

Lapan, Moschini, and Hanson have demonstrated that commodity options can be useful for hedgers who face a symmetric price distribution and who wish to maintain a net open market position. This is because options skew the distribution of profits to the right and such skewness typically increases expected utility. In this paper I use standard comparative statics to show that options are relatively more valuable for reducing the skewness of a nonsymmetric price distribution. Depending on the direction of the skewness and the underlying price expectations, hedgers may write options as well as purchase them.

Suggested Citation

  • James Vercammen, 1995. "Hedging with Commodity Options When Price Distributions are Skewed," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 77(4), pages 935-945.
    • Handle: RePEc:oup:ajagec:v:77:y:1995:i:4:p:935-945.
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    File URL: http://hdl.handle.net/10.2307/1243816
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    Cited by:

    1. Wojciechowski, Jan & Ames, Glenn C.W. & Turner, Steven C. & Miller, Bill R., 2000. "Marketing Of Cotton Fiber In The Presence Of Yield And Price Risk," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 32(3), pages 1-9, December.
    2. Marin Bozic, 2010. "Pricing Options on Commodity Futures: The Role of Weather and Storage," Working Papers 1003, The Institute of Economics, Zagreb.
    3. Raphaël H. Boroumand & Stéphane Goutte & Ehud I. Ronn, 2020. "Characterizing the hedging policies of commodity price‐sensitive corporations," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(8), pages 1264-1281, August.
    4. Bozic, Marin & Fortenbery, T. Randall, 2011. "Pricing Options on Commodity Futures: The Role of Weather and Storage," 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania 103638, Agricultural and Applied Economics Association.
    5. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    6. Wang, Dabin & Tomek, William G., 2005. "Characterizing Distributions of Class III Milk Prices: Implications for Risk Management," Working Papers 127085, Cornell University, Department of Applied Economics and Management.
    7. 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).

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