Integrated production and risk hedging with financial instruments
Haksöz, Çağrı and Seshadri, Sridhar (2009) Integrated production and risk hedging with financial instruments. [Working Paper / Technical Report] Sabanci University ID:SU_FMAN_2009/0003
We review the existing literature on integrated production and risk hedging with forwards/futures and options for a risk averse firm in single and multi period settings. We illustrate the value of hedging joint price, basis, and yield risks using forwards/futures and options. Then, we analyze the procurement problem of a risk neutral commodity producer who sells via a long-term fixed-price contract, fulfilling buyer's stochastic demand and intelligently trading in the spot market. We solve a continuous time, infinite horizon stochastic control problem in order to determine the optimal policy for production and spot market trading.
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