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Optimal Hedging under Forward-Looking Behaviour

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  • Lence, Sergio H
  • Hayes, Dermot J

Abstract

This study focuses on the production and hedging behavior of forward-looking, risk-averse competitive firms. It is shown that there is separation between production and hedging. Optimal production for a forward-looking firm is identical to that of an otherwise equivalent myopic firm. However, the optimal forward-looking hedge differs from the optimal myopic hedge. If forward prices are unbiased, full hedging is suboptimal when the firm is forward looking and output and material input prices are contemporaneously related. Furthermore, under certain conditions, the optimal forward-looking hedge under unbiased forward prices is strictly smaller than the full hedge. Copyright 1995 by The Economic Society of Australia.

Suggested Citation

  • Lence, Sergio H & Hayes, Dermot J, 1995. "Optimal Hedging under Forward-Looking Behaviour," The Economic Record, The Economic Society of Australia, vol. 71(215), pages 329-342, December.
    • Handle: RePEc:bla:ecorec:v:71:y:1995:i:215:p:329-42
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    Cited by:

    1. Wong, Kit Pong, 2006. "The effects of abandonment options on operating leverage and forward hedging," International Review of Economics & Finance, Elsevier, vol. 15(1), pages 72-86.
    2. Garcia, Philip & Nelson, Carl H., 2003. "Engaging Students In Research: The Use Of Structured Professional Dialogue," 2003 Annual meeting, July 27-30, Montreal, Canada 21894, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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