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Optimal Hedging Under Forward‐Looking Behaviour

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  • SERGIO H. LENCE
  • DERMOT J. HAYES

Abstract

The study focuses on the production and hedging behaviour of forward‐looking risk‐averse competitive firms. It is shown that there is separation between production and hedging. Optimal productin 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.

Suggested Citation

  • Sergio H. Lence & Dermot J. Hayes, 1995. "Optimal Hedging Under Forward‐Looking Behaviour," The Economic Record, The Economic Society of Australia, vol. 71(4), pages 329-342, December.
    • Handle: RePEc:bla:ecorec:v:71:y:1995:i:4:p:329-342
    DOI: 10.1111/j.1475-4932.1995.tb02678.x
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    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.

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    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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