Imperfect Forward Markets and Hedging |
| |
| Authors: | Udo Broll & Kit Pong Wong |
| |
| Institution: | Department of Economics, University of Saarland, Germany,;School of Economics and Finance, University of Hong Kong |
| |
| Abstract: | This paper considers a hedging model of a risk-averse competitive firm facing output price uncertainty. Imperfections exist in forward transactions in that the firm faces a downward-sloping demand function for its forward sales. We show that the optimal output and hedge ratio of the firm are, in general, not separable, and are related in a deterministic manner. We also derive some economic implications of production and hedging decisions when firms differ in their attitudes towards risk. A more risk-averse firm is shown to produce less and hedge more than a less risk-averse firm.
(J.E.L.: D21, D81). |
| |
| Keywords: | |
|
|
