Optimal Hedging under Forward-Looking Behavior

Sergio Lence and Dermot Hayes

Center for Agricultural and Rural Development (CARD) Publications from Center for Agricultural and Rural Development (CARD) at Iowa State University

Abstract: The study focuses on the production and hedging behavior of forward-looking risk-averse competitive firms. It is shown that there is separation between production and hedging. Optimal production for a forward-looking firm is identical to that of an otherwise equivalent myopic firm. However, the optimal forward-looking hedge differs from the optimal myopic hedge. If forward prices are unbiased, full hedging is suboptimal when the firm is forward-looking and output and material input prices are contemporaneously related. Furthermore, under certain conditions, the optimal forward-looking hedge under unbiased forward prices is strictly smaller than the full hedge.

Keywords: Futures; hedging; forward-looking decision making. (search for similar items in EconPapers)
JEL-codes: D81 G13 (search for similar items in EconPapers)
Date: 1993-06
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https://www.card.iastate.edu/products/publications/pdf/93wp108.pdf Full Text (application/pdf)
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Related works:
Journal Article: Optimal Hedging Under Forward‐Looking Behaviour (1995)
Working Paper: Optimal Hedging Under Forward-Looking Behavior (1995)
Working Paper: Optimal Hedging Under Forward-Looking Behaviour (1995)
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Persistent link: https://EconPapers.repec.org/RePEc:ias:cpaper:93-wp108

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