Production Flexibility and Hedging
Risks, 3(4):543-552, 2015
14 Pages Posted: 26 Apr 2014 Last revised: 5 Jan 2023
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: Suggested Citation
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