Optimal hedging strategies for salmon producers

Peter Schütz and Sjur Westgaard

Journal of Commodity Markets, 2018, vol. 12, issue C, 60-70

Abstract: We study the optimal hedging decisions for a risk-averse salmon producer. The hedging decisions are determined using a multistage stochastic programming model. The objective is to maximize the weighted sum of expected revenues from selling salmon either in the spot market or in futures contracts and Conditional Value-at-Risk (CVaR) of the revenues over the planning horizon. The scenario tree for the multistage stochastic programming model is generated based on a procedure that combines Principal Component Analysis and state space modelling. We present results for 3 different CVaR percentiles and different degrees of risk-aversion. The results indicate that salmon producers should use futures contracts to hedge price risk already at fairly low degrees of risk-aversion. The methods described in this paper will be useful as a decision support tool for determining fish companies' risk management and hedging strategies.

Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jocoma:v:12:y:2018:i:c:p:60-70

DOI: 10.1016/j.jcomm.2017.12.009

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