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Hedging Role of Options and Futures Under Joint Price, Basis and Production Risk, The

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  • Moschini, GianCarlo
  • Lapan, Harvey E.

Abstract

This paper analyzes the optimal production and hedging decisions for firms facing futures price, basis and production risk, assuming futures and options can be used. Using CARA (constant absolute risk aversion) utility and normal distributions, we derive an exact solution and show that joint production and price risk lead to a hedging role for options. Risk averse firms that can use each hedging instrument will generally have higher (expected) output. Using Iowa data for soybeans, the parameters of the joint distribution of future prices, cash prices and yields are estimated and the results are used to approximate optimal hedging decisions for soybean producers.

Suggested Citation

  • Moschini, GianCarlo & Lapan, Harvey E., 1995. "Hedging Role of Options and Futures Under Joint Price, Basis and Production Risk, The," Staff General Research Papers Archive 5137, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genres:5137
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    References listed on IDEAS

    as
    1. Jean-Philippe Gervais & Harvey E. Lapan, 2001. "Optimal Production Tax and Quota under Time Consistent Trade Policies," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(4), pages 921-933.
    2. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, pages 546-554.
    3. Bergstrom, Theodore C, 1982. "On Capturing Oil Rents with a National Excise Tax," American Economic Review, American Economic Association, pages 194-201.
    4. Dasgupta, Partha & Stiglitz, Joseph E, 1977. "Tariffs vs . Quotas as Revenue Raising Devices under Uncertainty," American Economic Review, American Economic Association, pages 975-981.
    5. Karp, Larry & Newbery, David M., 1991. "Optimal tariffs on exhaustible resources," Journal of International Economics, Elsevier, pages 285-299.
    6. Leslie Young & James E. Anderson, 1982. "Risk Aversion and Optimal Trade Restrictions," Review of Economic Studies, Oxford University Press, vol. 49(2), pages 291-305.
    7. Fishelson, Gideon & Flatters, Frank, 1975. "The (non)equivalence of optimal tariffs and quotas under uncertainty," Journal of International Economics, Elsevier, pages 385-393.
    8. Falvey, Rodney E & Lloyd, P J, 1991. "Uncertainty and the Choice of Protective Instrument," Oxford Economic Papers, Oxford University Press, vol. 43(3), pages 463-478, July.
    9. Copeland, Brian R & Tower, Edward & Webb, Michael A, 1989. "On Negotiated Quotas, Tariffs, and Transfers," Oxford Economic Papers, Oxford University Press, vol. 41(4), pages 774-788, October.
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