The Hedging Role of Options and Futures under Joint Price, Basis, and Production Risk

GianCarlo Moschini and Harvey Lapan

International Economic Review, 1995, vol. 36, issue 4, 1025-49

Abstract: This paper analyzes the optimal production and hedging decisions for firms facing futures price, basis, and production risk, assuming futures and options can be used. Using constant absolute risk aversion utility and normal distributions, the authors derive an exact solution and show that joint production and price risk lead to a hedging role for options. Risk averse firms that can use each hedging instrument will generally have higher (expected) output. Using Iowa data for soybeans, the parameters of the joint distribution of future prices, cash prices, and yields are estimated and the results are used to approximate optimal hedging decisions for soybean producers. Copyright 1995 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1995
References: Add references at CitEc
Citations: View citations in EconPapers (57)

Downloads: (external link)
http://links.jstor.org/sici?sici=0020-6598%2819951 ... 0.CO%3B2-9&origin=bc full text (application/pdf)
Access to full text is restricted to JSTOR subscribers. See http://www.jstor.org for details.

Related works:
Working Paper: Hedging Role of Options and Futures Under Joint Price, Basis and Production Risk, The (1995)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ier:iecrev:v:36:y:1995:i:4:p:1025-49

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0020-6598

Access Statistics for this article

International Economic Review is currently edited by Harold L. Cole

More articles in International Economic Review from Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association 160 McNeil Building, 3718 Locust Walk, Philadelphia, PA 19104-6297. Contact information at EDIRC.
Bibliographic data for series maintained by Wiley-Blackwell Digital Licensing () and ().