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Article: Managing Revenue Risk of the Firm: Commodity Futures and Options
Title | Managing Revenue Risk of the Firm: Commodity Futures and Options |
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Authors | |
Issue Date | 2017 |
Publisher | Oxford University Press. The Journal's web site is located at http://imaman.oxfordjournals.org/ |
Citation | IMA Journal of Management Mathematics, 2017, v. 28, p. 245-258 How to Cite? |
Abstract | This paper examines the behavior of the competitive firm that faces not only output price uncertainty but also a revenue shock. The firm can trade fairly priced futures and put option contracts for hedging purposes. We show that neither the separation theorem nor the full-hedging theorem holds when the revenue shock prevails. The correlation between the random output price and the revenue shock plays a pivotal role in determining the firm's optimal production and hedging decisions. If the correlation is non-positive, the firm's optimal output level is smaller than that without the revenue shock. Furthermore, the firm's optimal hedge position consists of an under-hedge and a long put option position if the firm's preferences exhibit prudence. The prevalence of revenue risk as such makes financial and operational hedging act as complements to better cope with multiple sources of uncertainty. |
Persistent Identifier | http://hdl.handle.net/10722/250176 |
ISSN | 2023 Impact Factor: 1.9 2023 SCImago Journal Rankings: 0.730 |
ISI Accession Number ID |
DC Field | Value | Language |
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dc.contributor.author | Broll, U | - |
dc.contributor.author | Wong, KP | - |
dc.date.accessioned | 2017-12-20T09:21:53Z | - |
dc.date.available | 2017-12-20T09:21:53Z | - |
dc.date.issued | 2017 | - |
dc.identifier.citation | IMA Journal of Management Mathematics, 2017, v. 28, p. 245-258 | - |
dc.identifier.issn | 1471-678X | - |
dc.identifier.uri | http://hdl.handle.net/10722/250176 | - |
dc.description.abstract | This paper examines the behavior of the competitive firm that faces not only output price uncertainty but also a revenue shock. The firm can trade fairly priced futures and put option contracts for hedging purposes. We show that neither the separation theorem nor the full-hedging theorem holds when the revenue shock prevails. The correlation between the random output price and the revenue shock plays a pivotal role in determining the firm's optimal production and hedging decisions. If the correlation is non-positive, the firm's optimal output level is smaller than that without the revenue shock. Furthermore, the firm's optimal hedge position consists of an under-hedge and a long put option position if the firm's preferences exhibit prudence. The prevalence of revenue risk as such makes financial and operational hedging act as complements to better cope with multiple sources of uncertainty. | - |
dc.language | eng | - |
dc.publisher | Oxford University Press. The Journal's web site is located at http://imaman.oxfordjournals.org/ | - |
dc.relation.ispartof | IMA Journal of Management Mathematics | - |
dc.rights | Post-print: This is a pre-copy-editing, author-produced PDF of an article accepted for publication in [IMA Journal of Management Mathematics] following peer review. The definitive publisher-authenticated version [IMA Journal of Management Mathematics, 2017, v. 28, p. 245-258] is available online at: [http://dx.doi.org/10.1093/imaman/dpv019]. | - |
dc.title | Managing Revenue Risk of the Firm: Commodity Futures and Options | - |
dc.type | Article | - |
dc.identifier.email | Wong, KP: kpwongc@hkucc.hku.hk | - |
dc.identifier.authority | Wong, KP=rp01112 | - |
dc.description.nature | postprint | - |
dc.identifier.doi | 10.1093/imaman/dpv019 | - |
dc.identifier.scopus | eid_2-s2.0-85055344514 | - |
dc.identifier.hkuros | 283426 | - |
dc.identifier.volume | 28 | - |
dc.identifier.spage | 245 | - |
dc.identifier.epage | 258 | - |
dc.identifier.isi | WOS:000401003800005 | - |
dc.publisher.place | United Kingdom | - |
dc.identifier.issnl | 1471-678X | - |