Premium
Risk Aversion and the Recommended Hedging Ratio
Author(s) -
Bond Gary E.,
Thompson Stanley R.
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 - 10.2307/1241828
Subject(s) - futures contract , hedge , risk aversion (psychology) , decision maker , transaction cost , economics , commodity , cash , price risk , econometrics , database transaction , actuarial science , microeconomics , financial economics , expected utility hypothesis , finance , computer science , ecology , management science , programming language , biology
Individual risk preferences can have important implications for commodity hedging decisions. Existing literature suggests that when cash and futures positions are treated as endogenous, the optimal hedge ratio is independent of the risk parameter. Under similar conditions we demonstrate that the existence of nonlinear transaction or storage costs makes the decision maker's attitude toward risk a relevant determinant of the size of the optimal hedge ratio.