Ederington's ratio with production flexibility

Benoît Sévi

Economics Bulletin, 2006, vol. 7, issue 1, 1-8

Abstract: The impact of flexibility upon hedging decision is examined for a competitive firm under demand uncertainty. We show that if the firm can adapt its production subsequently to its hedging decision, the standard minimum variance hedge ratio from Ederington (Journal of Finance 34, 1979) is systematically biased. This resulting bias depends on the statistical relation between demand and futures prices.

JEL-codes: D2 G1 (search for similar items in EconPapers)
Date: 2006-01-06
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