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Corporate Hedging and Input Price Risk

Gary D. Koppenhaver and Steven Swidler
Managerial and Decision Economics
Vol. 17, No. 1 (Jan. - Feb., 1996), pp. 83-92
Published by: Wiley
Stable URL: http://www.jstor.org/stable/2487742
Page Count: 10
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Corporate Hedging and Input Price Risk
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Abstract

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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