Title

Multiperiod Production with Forward and Option Markets

Campus Units

Economics

Document Type

Article

Publication Version

Submitted Manuscript

Publication Date

1994

Journal or Book Title

American Journal of Agricultural Economics

Volume

76

Issue

2

First Page or Article ID Number

286

Last Page

295

DOI

10.2307/1243630

Abstract

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.

Comments

This working paper was published as Lence, Sergio H., Dermot J. Hayes and Yong Sakong, "Multiperiod Production with Forward and Option Markets," American Journal of Agricultural Economics 76 (1994): 286–295, doi:10.2307/1243630.