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

Author

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  • Moschini, GianCarlo
  • Lapan, Harvey E.

Abstract

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 in general also affects the firm input decisions.

Suggested Citation

  • Moschini, GianCarlo & Lapan, Harvey E., 1992. "Hedging Price Risk with Options and Futures for the Competitive Firm with Production Flexibility," Staff General Research Papers Archive 10043, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genres:10043
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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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