Seasonal Patterns of Futures Hedging and the Resolution of Output Uncertainty

David Hirshleifer

Journal of Economic Theory, April 1991


Optimal futures hedging is examined in a two-good model with stochastic output and sequential information arrival. A producer’s optimal hedge depends on demand elasticity, sensitivity of his output to weather, his correlation with aggregate output, and how rapidly his output uncertainty is resolved relative to other producers during different seasonal periods. Because regional output uncertainties are resolved at different times, the optimal futures position of a grower will commonly reverse in direction during the crop year. A producer with non-stochastic output who faces price risk arising from demand shocks may remain unhedged or even maintain a long position.

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