Dynamic Hedging with Uncertain Production

Larry Karp

International Economic Review, 1988, vol. 29, issue 4, 621-37

Abstract: This paper provides a closed-form rule for dynamic hedging with production uncertainty. The rule is obtained by considering a discret e time control problem, in the limit, as the interval between hedging opportunities goes to zero. Price may be expected to increase or decrease so that a speculative motive is present. In the absence of this motive and of discounting, the optimal hedge is myopic. For a given expected rate of change in price, the hedge may be expected to rise or fall depending on the degree of risk aversion. Copyright 1988 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1988
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Working Paper: Dynamic hedging with uncertain production (1985)
Working Paper: Dynamic Hedging with Uncertain Production (1985)
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