✦ LIBER ✦

Corporate hedging and input price risk

✍ Scribed by Gary D. Koppenhaver; Steven Swidler

Publisher: John Wiley and Sons
Year: 1996
Tongue: English
Weight: 894 KB
Volume: 17
Category: Article
ISSN: 0143-6570
DOI: 10.1002/(sici)1099-1468(199601)17:1<83::aid-mde743>3.0.co;2-l

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✦ Synopsis

Input price variability is an important source of risk for corporations that process raw commodities. Models of optimal input hedging are developed in this paper based on the maximization of managerial expected utility. The relationship between hedging strategies and output decisions is examined to assess the impact of the ability to set output prices on futures market participation. As a firm's ability to set output prices diminishes in the short run, input futures positions increase although the optimal hedge ratio may either increase or decrease. For a perfectly competitive firm, however, shifts in output price caused by input price changes provide a natural cash market hedge of input price risk and reduce the firm's optimal input futures position.

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