Production Flexibility and Hedging

Risks, 3(4):543-552, 2015

14 Pages Posted: 26 Apr 2014 Last revised: 5 Jan 2023

See all articles by Georges Dionne

Georges Dionne

HEC Montreal - Department of Finance

Marc Santugini

University of Virginia - Department of Economics

Date Written: October 22, 2015

Abstract

We extend the analysis of Losq (1982) on hedging with price and output uncertainty by endogenizing the output decision. Specifically, we consider the joint determination of output and hedging in the case of flexibility in production. We show that the risk-averse firm always maintains a short position in the futures market when the futures price is actuarially fair. Moreover, in the context of an example, we show that the presence of production flexibility reduces the incentive to hedge for all risk averse agents.

Keywords: Hedging, Full-hedging result, Production flexibility, Price and output uncertainty

JEL Classification: G1, L2

Suggested Citation

Dionne, Georges and Santugini, Marc, Production Flexibility and Hedging (October 22, 2015). Risks, 3(4):543-552, 2015, Available at SSRN: https://ssrn.com/abstract=2429060 or http://dx.doi.org/10.2139/ssrn.2429060

Georges Dionne

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-6596 (Phone)
514-340-5019 (Fax)

HOME PAGE: http://www.hec.ca/gestiondesrisques/

Marc Santugini (Contact Author)

University of Virginia - Department of Economics ( email )

P.O. Box 400182
Charlottesville, VA 22904-4182
United States

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