The expected utility maximization problem is solved for producers with both price and production uncertainty who have access to both futures and options markets. Introduction of production uncertainty alters the optimal futures and options position and almost always makes it optimal for the producer to purchase put options and to underhedge on the futures market. Simulation results lend support to the practice of hedging the minimum expected yield on the futures market and hedging remaining expected production against downside price risk using put options. The results are strengthened if the producer expects local production to influence national prices and if risk aversion is higher at low income levels.
Production and hedging in both forward and options markets are analyzed for forward-looking firms that maximize expected utility. In the presence of unbiased forward and options prices, it is shown that such firms will use options as hedging instruments. This result contrasts with the conclusions from studies that assume myopic behavior, and occurs because forward looking agents care about the effect of future output prices on profits from future production cycles. Simulations support the theoretical results and show how the introduction of an options market influences the optimal forward position.
MUL TIPERIOD PRODUCTION WITH FORWARD AND OPTION MARKETS
AbstractProduction and hedging in both forward and options markets are analyzed for forward-
A test for preference stability is developed that strengthens existing nonparametric procedures. The test uses indifference curve convexity to restrict (unobservable) compensated consumption bundles. Adding up, noninferiority, and the Slutsky equation are used to limit the range of these compensated consumption bundles. A program is proposed that simultaneously measures the changes in consumption quantities satisfying the theoretical restrictions and the expenditure elasticities minimizing the required changes. The program is applied to meat consumption data and is shown to be capable of detecting small changes in preference.
Data and Method 67 Results and Discussion 69 Changes the absolute risk-aversion coefficient (rows 1 through 4) 71 Changes the elasticity coefficient (if) and the nature of production uncertainty (rows 6 through 11) 71 Revenue-dependent risk aversion (rows 7 and 12) 73 CONCLUSIONS 75
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