Optimal Hedge Ratios with Risk-Neutral Producers and Nonlinear Borrowing Costs

B Brorsen

American Journal of Agricultural Economics, 1995, vol. 77, issue 1, 174-181

Abstract: A new theory of hedging is derived assuming producers are risk neutral, forward pricing is costly, and borrowing costs are nonlinear. The standard risk-minimizing hedge ratio is derived when forward pricing is costless. When the assumption of costless hedging is dropped, high-leveraged firms are shown to hedge more than do low-leveraged firms. If the value of capital is uncorrelated with output price, firms are shown to hedge more as cash price variability increases. Thus, the model can be consistent with what firms actually do.

Date: 1995
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Persistent link: https://EconPapers.repec.org/RePEc:oup:ajagec:v:77:y:1995:i:1:p:174-181.

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