Title

Optimal Hedging Under Forward-Looking Behaviour

Campus Units

Economics

Document Type

Article

Publication Version

Submitted Manuscript

Publication Date

12-1995

Journal or Book Title

Economic Record

Volume

71

Issue

4

First Page or Article ID Number

329

Last Page

342

DOI

10.1111/j.1475-4932.1995.tb02678.x

Abstract

The 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.

Comments

This working paper was published as Lence, Sergio H. and Dermot J. Hayes, "Optimal Hedging Under Forward-Looking Behaviour," Economic Record 71 (1995): 329–342, doi:10.1111/j.1475-4932.1995.tb02678.x.