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Imperfect Forward Markets and Hedging

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  • Udo Broll
  • Kit Pong Wong

Abstract

type="main" xml:lang="en"> This paper considers a hedging model of a risk-averse competitive firm facing output price uncertainty. Imperfections exist in forward transactions in that the firm faces a downward-sloping demand function for its forward sales. We show that the optimal output and hedge ratio of the firm are, in general, not separable, and are related in a deterministic manner. We also derive some economic implications of production and hedging decisions when firms differ in their attitudes towards risk. A more risk-averse firm is shown to produce less and hedge more than a less risk-averse firm. (J.E.L.: D21, D81).

Suggested Citation

  • Udo Broll & Kit Pong Wong, 2002. "Imperfect Forward Markets and Hedging," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 31(1), pages 143-154, February.
    • Handle: RePEc:bla:ecnote:v:31:y:2002:i:1:p:143-154
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    File URL: http://hdl.handle.net/10.1111/1468-0300.00076
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