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Risks 2015, 3(4), 543-552; doi:10.3390/risks3040543

Production Flexibility and Hedging

1
Department of Finance, CIRPÉE and CIRRELT, HEC Montréal, Montréal, QC H3T 2A7, Canada
2
Department of Applied Economics and CIRPÉE, HEC Montréal, Montréal, QC H3T 2A7, Canada
*
Author to whom correspondence should be addressed.
Academic Editors: Emiliano A. Valdez, Albert Cohen and Nick Costanzino
Received: 18 July 2015 / Accepted: 25 November 2015 / Published: 4 December 2015
(This article belongs to the Special Issue Recent Advances in Mathematical Modeling of the Financial Markets)
View Full-Text   |   Download PDF [276 KB, uploaded 4 December 2015]   |  

Abstract

We extend the analysis on hedging with price and output uncertainty by endogenizing the output decision. Specifically, we consider the joint determination of output and hedging in the case of flexibility in production. We show that the risk-averse firm always maintains a short position in the futures market when the futures price is actuarially fair. Moreover, in the context of an example, we show that the presence of production flexibility reduces the incentive to hedge for all risk averse agents. View Full-Text
Keywords: hedging; full-hedging result; production flexibility; price and output uncertainty; G1; L2 hedging; full-hedging result; production flexibility; price and output uncertainty; G1; L2
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).

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Dionne, G.; Santugini, M. Production Flexibility and Hedging. Risks 2015, 3, 543-552.

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