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Corporate hedging and input price risk
Author(s) -
Koppenhaver Gary D.,
Swidler Steven
Publication year - 1996
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/(sici)1099-1468(199601)17:1<83::aid-mde743>3.0.co;2-l
Subject(s) - futures contract , hedge , economics , position (finance) , maximization , microeconomics , cash , market price , set (abstract data type) , price risk , econometrics , market neutral , financial economics , computer science , finance , portfolio , ecology , programming language , biology
Input price variability is an important source of risk for corporations that process raw commodities. Models of optimal input hedging are developed in this paper based on the maximization of managerial expected utility. The relationship between hedging strategies and output decisions is examined to assess the impact of the ability to set output prices on futures market participation. As a firm's ability to set output prices diminishes in the short run, input futures positions increase although the optimal hedge ratio may either increase or decrease. For a perfectly competitive firm, however, shifts in output price caused by input price changes provide a natural cash market hedge of input price risk and reduce the firm's optimal input futures position.