IDEAS home Printed from https://ideas.repec.org/p/isu/genres/559.html
   My bibliography  Save this paper

Hedging Production Risk with Options

Author

Listed:
  • Sakong, Yong
  • Hayes, Dermot J.
  • Hallam, Arne

Abstract

The expected utility maximization problem is solved for producers with both price and production uncertainty who have access to both futures and options markets. Introduction of production uncertainty alters the optimal futures and options position and almost always makes it optimal for the producer to purchase put options and to underhedge on the futures market. Simulation results lend support to the practice of hedging the minimum expected yield on the futures market and hedging remaining expected production against downside price risk using put options. The results are strengthened if the producer expects local production to influence national prices and if risk aversion is higher at low income levels.

Suggested Citation

  • Sakong, Yong & Hayes, Dermot J. & Hallam, Arne, 1993. "Hedging Production Risk with Options," Staff General Research Papers Archive 559, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genres:559
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Cecchetti, Stephen G & Cumby, Robert E & Figlewski, Stephen, 1988. "Estimation of the Optimal Futures Hedge," The Review of Economics and Statistics, MIT Press, pages 623-630.
    2. Roger W. Gray, 1961. "The Search for a Risk Premium," Journal of Political Economy, University of Chicago Press, vol. 69, pages 250-250.
    3. Jacob Paroush & Avner Wolf, 1989. "Production and hedging decisions in the presence of basis risk," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 9(6), pages 547-563, December.
    4. Larry Martin & Philip Garcia, 1981. "The Price-Forecasting Performance of Futures Markets for Live Cattle and Hogs: A Disaggregated Analysis," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 63(2), pages 209-215.
    5. Chavas, Jean-Paul & Pope, Rulon D., 1982. "Hedging And Production Decisions Under A Linear Mean-Variance Preference Function," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 7(01), July.
    6. Frances Antonovitz & Terry Roe, 1986. "Effects of expected cash and futures prices on hedging and production," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 6(2), pages 187-205, June.
    7. Losq, Etienne, 1982. "Hedging with price and output uncertainty," Economics Letters, Elsevier, vol. 10(1-2), pages 65-70.
    8. Diewert, W E, 1971. "An Application of the Shephard Duality Theorem: A Generalized Leontief Production Function," Journal of Political Economy, University of Chicago Press, vol. 79(3), pages 481-507, May-June.
    9. Anderson, Ronald W & Danthine, Jean-Pierre, 1980. " Hedging and Joint Production: Theory and Illustrations," Journal of Finance, American Finance Association, vol. 35(2), pages 487-498, May.
    10. Honda, Yuzo, 1983. "Production uncertainty and the input decision of the competitive firm facing the futures market," Economics Letters, Elsevier, vol. 11(1-2), pages 87-92.
    11. Richard E. Just & Gordon C. Rausser, 1981. "Commodity Price Forecasting with Large-Scale Econometric Models and the Futures Market," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 63(2), pages 197-208.
    12. Cecchetti, Stephen G & Cumby, Robert E & Figlewski, Stephen, 1988. "Estimation of the Optimal Futures Hedge," The Review of Economics and Statistics, MIT Press, pages 623-630.
    13. Robert J. Myers & Stanley R. Thompson, 1989. "Generalized Optimal Hedge Ratio Estimation," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 71(4), pages 858-868.
    14. Hey, John D, 1987. "The Dynamic Competitive Firm under Spot Price Uncertainty," The Manchester School of Economic & Social Studies, University of Manchester, vol. 55(1), pages 1-12, March.
    15. 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.
    16. Dwight Grant, 1985. "Theory of the Firm with Joint Price and Output Risk and a Forward Market," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 67(3), pages 630-635.
    17. Simon Benninga & Rafael Eldor & Itzhak Zilcha, 1984. "The optimal hedge ratio in unbiased futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 4(2), pages 155-159, June.
    18. Ederington, Louis H, 1979. "The Hedging Performance of the New Futures Markets," Journal of Finance, American Finance Association, vol. 34(1), pages 157-170, March.
    19. Ronald W. Anderson & Jean-Pierre Danthine, 1983. "The Time Pattern of Hedging and the Volatility of Futures Prices," Review of Economic Studies, Oxford University Press, vol. 50(2), pages 249-266.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Utkur Djanibekov & Asia Khamzina, 2016. "Stochastic Economic Assessment of Afforestation on Marginal Land in Irrigated Farming System," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, pages 95-117.
    2. 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.
    3. Wilson, William W. & Wagner, Robert & Nganje, William E., 2003. "Strategic Hedging For Grain Processors," Agribusiness & Applied Economics Report 23637, North Dakota State University, Department of Agribusiness and Applied Economics.
    4. Zhang, Rui (Carolyn) & Houston, Jack E. & Vedenov, Dmitry V. & Barnett, Barry J., 2008. "Impacts of government risk management policies on hedging in futures and options:LPM2 hedge model vs. EU hedge model," 2008 Conference, April 21-22, 2008, St. Louis, Missouri 37610, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    5. Larson, Donald F. & Varangis, Panos & Yabuki, Nanae, 1998. "Commodity risk management and development," Policy Research Working Paper Series 1963, The World Bank.
    6. Hung, Yick-Hin & Li, Leon Y.O. & Cheng, T.C.E., 2013. "Transfer of newsvendor inventory and supply risks to sub-industry and the public by financial instruments," International Journal of Production Economics, Elsevier, vol. 143(2), pages 567-573.
    7. 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.
    8. Donald Lien & Mei Zhang, 2008. "A Survey of Emerging Derivatives Markets," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 44(2), pages 39-69, March.
    9. Ning, Zi “Nancy” & Tucker, Alan L., 2011. "Hedging import commodity prices for BRICS nations," Global Finance Journal, Elsevier, pages 182-190.
    10. 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).
    11. Coble, Keith H. & Heifner, Richard G. & Zuniga, Manuel, 2000. "Implications Of Crop Yield And Revenue Insurance For Producer Hedging," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 25(02), December.
    12. Coble, Keith H. & Barnett, Barry J., 1999. "The Role Of Research In Producer Risk Management," Professional Papers 15803, Mississippi State University, Department of Agricultural Economics.
    13. Xing, Liu & Pietola, Kyosti, 2005. "Forward Hedging Under Price and Production Risk of Wheat," 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark 24467, European Association of Agricultural Economists.
    14. Coble, Keith H. & Zuniga, Manuel & Heifner, Richard, 2003. "Evaluation of the interaction of risk management tools for cotton and soybeans," Agricultural Systems, Elsevier, pages 323-340.
    15. Utkur Djanibekov & Asia Khamzina, 2016. "Stochastic Economic Assessment of Afforestation on Marginal Land in Irrigated Farming System," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, pages 95-117.
    16. McNew, Kevin, 1996. "Spatial Market Integration: Definition, Theory, And Evidence," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 25(1), April.
    17. 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.
    18. Donald Lien & Mei Zhang, 2008. "A Survey of Emerging Derivatives Markets," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 44(2), pages 39-69, March.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:isu:genres:559. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Curtis Balmer). General contact details of provider: http://edirc.repec.org/data/deiasus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.