MULTIPERIOD PRODUCTION WITH FORWARD AND OPTION MARKETS

Production and hedging in both forward and options markets are analyze d for forward-looking firms that maximize expected utility. In the pre sence of unbiased forward and options prices, it is shown that such fi rms will use options as hedging instruments. This result contrasts wit h the conclusions from studies that assume myopic behavior, and occurs because forward-looking agents care about the effect of future output prices on profits from future production cycles. Simulations support the theoretical results and show how the introduction of an options ma rket influences the optimal forward position.