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Optimal Hedging Under Forward-Looking Behavior

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Publication date
04/06/1993
Number of Pages
33
Language:
English
Type of Publication:
Studies
Working Papers & Briefs
Focus Region:
Global
Focus Topic:
Market / Trade
Type of Risk:
Market-related
Type of Risk Managment Option:
Risk coping
Risk assessment
Commodity:
Other
Author
Sergio H. Lence, Dermot J. Hayes
Organization
Center for Agricultural and Rural Development (CARD)

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. The purpose of this study is to formally demonstrate that the forward-looking optimal hedge is different from the myopic optimal hedge. The paper postulates a risk-averse firm that maximizes expected utility of terminal wealth and derives some propositions regarding optimal hedging behavior under both myopic and forward-looking hypothesis.