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Theory of the Firm with Joint Price and Output Risk and a Forward Market
Author(s) -
Grant Dwight
Publication year - 1985
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 - 10.2307/1241086
Subject(s) - futures contract , economics , forward price , position (finance) , commodity , price risk , production (economics) , microeconomics , value (mathematics) , forward contract , hedge , financial economics , forward market , covariance , market risk , scale (ratio) , econometrics , market price , market economy , finance , mathematics , ecology , statistics , physics , quantum mechanics , biology
Expected utility maximizing farmers facing just price risk or both price risk and quantity risk behave similarly in the absence of a forward market. If forward contracting is possible, that is not true because variation in the commodity price affects a farmer's wealth through the value of his futures position, the value of his output and through the covariance between price and output. This covariance affects a farmer's optimal scale of production, his optimal forward position and the interrelationship between the scale of production and forward trading.

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