Hedging with Commodity Options When Price Distributions are Skewed

James Vercammen

American Journal of Agricultural Economics, 1995, vol. 77, issue 4, 935-945

Abstract: Lapan, Moschini, and Hanson have demonstrated that commodity options can be useful for hedgers who face a symmetric price distribution and who wish to maintain a net open market position. This is because options skew the distribution of profits to the right and such skewness typically increases expected utility. In this paper I use standard comparative statics to show that options are relatively more valuable for reducing the skewness of a nonsymmetric price distribution. Depending on the direction of the skewness and the underlying price expectations, hedgers may write options as well as purchase them.

Date: 1995
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