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Production Flexibility and Hedging

Georges Dionne and Marc Santugini ()
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Marc Santugini: Department of Applied Economics and CIRPÉE, HEC Montréal, Montréal, QC H3T 2A7, Canada

Risks, 2015, vol. 3, issue 4, 1-10

Abstract: We extend the analysis on hedging with price and output uncertainty by endogenizing the output decision. Specifically, we consider the joint determination of output and hedging in the case of flexibility in production. We show that the risk-averse firm always maintains a short position in the futures market when the futures price is actuarially fair. Moreover, in the context of an example, we show that the presence of production flexibility reduces the incentive to hedge for all risk averse agents.

Keywords: hedging; full-hedging result; production flexibility; price and output uncertainty; G1; L2 (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 M2 M4 K2 (search for similar items in EconPapers)
Date: 2015
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Working Paper: Production Flexibility and Hedging (2014) Downloads
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