Effects of expected cash and futures prices on hedging and production

✍ Scribed by Frances Antonovitz; Terry Roe

• Publisher: John Wiley and Sons
• Year: 1986
• Tongue: English
• Weight: 928 KB
• Volume: 6
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.3990060203

✦ Synopsis

odels of the competitive firm under price uncertainty using forward markets M have been examined by Holthausen (1979), Feder, Just, and Schmitz (1980), and Anderson and Danthine (1983). In these models, a risk-averse competitive firm is assumed to face output price uncertainty but production is nearly certain and there is no basis risk. Earlier models by Sandmo (1971) lacking a forward market concluded that an increase in expected price would result in increased production while increased price uncertainty would lead to decreased production. But if a forward market exists, Feder, Just, and Schmitz, and Anderson and Danthine show that production decisions depend only on the forward price and input costs, eliminating output fluctuations due to producer's subjective distributions of the future spot price. These results, of course, are contingent on allowing firms to hedge or speculate in the forward market.

For a number of reasons, many firms do not speculate. Generally, there are larger margin requirements for speculators than for hedgers. Many bankers are willing to lend to hedgers who hold a commodity or will produce one in the near future but will not lend to speculators who do not hold such collateral. Thus, producers may hedge part of their output hased on expected production. The Feder, Just, and Schmitz, and Anderson and Danthine findings are not applicable for the nonspec-

The authors wish to gratefiilly arknowledge helpful dis~ussii~ns with Clifford Hildreth and Timothy Park and to Giannini Foundation Paper No. 7114.

thank Carole Nnrhton for her editorial assistance.