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Multiperiod Production with Forward and Option Markets
Author(s) -
Lence Sergio H.,
Hayes Dermot J.,
Sakong Yong
Publication year - 1994
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 - 10.2307/1243630
Subject(s) - production (economics) , position (finance) , economics , microeconomics , forward contract , forward price , futures contract , financial economics , finance
Production and hedging in both forward and options markets are analyzed for forward‐looking firms that maximize expected utility. In the presence of unbiased forward and options prices, it is shown that such firms will use options as hedging instruments. This result contrasts with the conclusions from studies that assume myopic behavior, and occurs because forward‐looking agents care about the effect of future output prices on profits from future production cycles. Simulations support the theoretical results and show how the introduction of an options market influences the optimal forward position.