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Production Flexibility and Hedging

Author

Listed:
  • Georges Dionne

    (Department of Finance, CIRPÉE and CIRRELT, HEC Montréal, Montréal, QC H3T 2A7, Canada)

  • Marc Santugini

    (Department of Applied Economics and CIRPÉE, HEC Montréal, Montréal, QC H3T 2A7, Canada)

Abstract

We extend the analysis 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.

Suggested Citation

  • Georges Dionne & Marc Santugini, 2015. "Production Flexibility and Hedging," Risks, MDPI, vol. 3(4), pages 1-10, December.
    • Handle: RePEc:gam:jrisks:v:3:y:2015:i:4:p:543-552:d:59972
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    References listed on IDEAS

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    1. Ethier, Wilfred, 1973. "International Trade and the Forward Exchange Market," American Economic Review, American Economic Association, vol. 63(3), pages 494-503, June.
    2. Diamond, Peter A. & Stiglitz, Joseph E., 1974. "Increases in risk and in risk aversion," Journal of Economic Theory, Elsevier, vol. 8(3), pages 337-360, July.
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    5. Tufano, Peter, 1996. "Who Manages Risk? An Empirical Examination of Risk Management Practices in the Gold Mining Industry," Journal of Finance, American Finance Association, vol. 51(4), pages 1097-1137, September.
    6. Dionne, Georges & Santugini, Marc, 2014. "Entry, imperfect competition, and futures market for the input," International Journal of Industrial Organization, Elsevier, vol. 35(C), pages 70-83.
    7. Holthausen, Duncan M, 1979. "Hedging and the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 69(5), pages 989-995, December.
    8. Moschini, Giancarlo & Lapan, Harvey E, 1992. "Hedging Price Risk with Options and Futures for the Competitive Firm with Production Flexibility," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(3), pages 607-618, August.
    9. Mohamed Mnasri & Georges Dionne & Jean-Pierre Gueyie, 2013. "How Do Firms Hedge Risks? Empirical Evidence from U.S. Oil and Gas Producers," Cahiers de recherche 1307, CIRPEE.
    10. Paroush, Jacob & Wolf, Avner, 1992. "The Derived Demand with Hedging Cost Uncertainty in the Futures Markets," Economic Journal, Royal Economic Society, vol. 102(413), pages 831-844, July.
    11. Gershon Feder & Richard E. Just & Andrew Schmitz, 1980. "Futures Markets and the Theory of the Firm under Price Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 94(2), pages 317-328.
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    Cited by:

    1. Mnasri, Mohamed & Dionne, Georges & Gueyie, Jean-Pierre, 2017. "The use of nonlinear hedging strategies by US oil producers: Motivations and implications," Energy Economics, Elsevier, vol. 63(C), pages 348-364.

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    More about this item

    Keywords

    hedging; full-hedging result; production flexibility; price and output uncertainty; G1; L2;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises

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