Production and hedging in futures markets with multiple delivery specifications

Kit Wong ()

Decisions in Economics and Finance, 2014, vol. 37, issue 2, 413-421

Abstract: This paper examines the behavior of the competitive firm under price uncertainty. To hedge the price risk, the firm trades unbiased commodity futures contracts with multiple delivery specifications from which delivery risk prevails. We show that the firm optimally produces less in the presence than in the absence of the delivery risk. We show further that the concept of expectation dependence that describes how the delivery risk is correlated with the random spot price plays a pivotal role in determining the firm’s optimal futures position. Specifically, an under-hedge is optimal if the random spot price is positively expectation dependent on the delivery risk. The firm’s optimal futures position becomes indeterminate if the random spot price is negatively expectation dependent on the delivery risk. Copyright Springer-Verlag Italia 2014

Keywords: Delivery risk; Expectation dependence; Futures hedging; Production; D21; D81; G13 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s10203-013-0152-z

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