Production and hedging under correlated price and background risks

This paper examines the competitive firm that has to make its production and hedging decisions under correlated price background risks. The risk can be either financial or non-financial, which is accommodated by using a bivariate utility function. separation theorem shown hold in firm’s optimal output level depends neither on function nor joint distribution of We derive necessary sufficient conditions optimally opts for an over-hedge (under-hedge). further positive (negative) effect level. These are related concept expectation dependence preferences include correlation aversion (correlation loving) cross-prudence (cross-imprudence).