What to do if a dollar is not a dollar? The impact of inflation risk on production and risk management
✍ Scribed by Axel F. A. Adam-Müller
- Publisher
- John Wiley and Sons
- Year
- 2002
- Tongue
- English
- Weight
- 123 KB
- Volume
- 22
- Category
- Article
- ISSN
- 0270-7314
No coin nor oath required. For personal study only.
✦ Synopsis
Abstract
An entrepreneur faces two types of risk: one from income generation, one from income spending. His income
from firm profits is risky due to output price fluctuations and other risks. As a consumer, he is also exposed
to inflation risk since he maximizes expected utility of real income. This article focuses on optimal production
and risk management decisions of a risk‐averse entrepreneur jointly facing tradable output price risk and
untradable inflation risk. Inflation risk applies multiplicatively to the entrepreneur's entire nominal
income. Relative risk aversion and the risks' joint distribution determine the effect of introducing a
futures market on production. For dependent risks, this effect may be negative if relative risk aversion is
above one. Relative risk aversion and the joint distribution also determine optimal risk management with futures
contracts where speculation on a real risk premium and cross hedging may be conflicting objectives. © 2002
Wiley Periodicals, Inc. Jrl Fut Mark 22:371–386, 2002