Publication Date

8-1993

Series Number

93-WP 112

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.

Publication Information

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.

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