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The Demand for Hedging and the Value of Hedging Opportunities
Author(s) -
Frechette Darren L.
Publication year - 2000
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.1111/0002-9092.00089
Subject(s) - futures contract , economics , preference , futures market , value (mathematics) , marginal value , basis risk , marginal utility , market neutral , microeconomics , financial economics , mathematics , portfolio , statistics , capital asset pricing model
Hedging strategies typically assume that hedging is costless and that only one futures market exists. When these assumptions are dropped, the demand for hedging is shown to depend on basis risk, price risk, and the hedger's risk preference. The marginal and incremental value of hedging opportunities are computed for the general cases of one and two markets and applied to the specific case of Pennsylvania dairy input hedging.