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Hedging Production Risk With Options
Author(s) -
Sakong Yong,
Hayes Dermot J.,
Hallam Arne
Publication year - 1993
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 - 10.2307/1242925
Subject(s) - futures contract , production (economics) , downside risk , economics , position (finance) , yield (engineering) , expected utility hypothesis , maximization , price risk , utility maximization , risk aversion (psychology) , convenience yield , microeconomics , financial economics , hedge , market price , futures market , spot contract , finance , portfolio , ecology , materials science , biology , metallurgy , mathematical economics
The expected utility maximization problem is solved for producers with both price and production uncertainty who have access to both futures and options markets. Introduction of production uncertainty alters the optimal futures and options position and almost always makes it optimal for the producer to purchase put options and to underhedge on the futures market. Simulation results lend support to the practice of hedging the minimum expected yield on the futures market and hedging remaining expected production against downside price risk using put options. The results are strengthened if the producer expects local production to influence national prices and if risk aversion is higher at low income levels.