Production Hedging and Speculative Decisions with Options and Future Markets: Reply

A hypothesis that hedging will not be an important factor for risk-averse investors when uncertainty is caused by futures prices and when basis risk is not associated with futures price is defended. Under a condition of constant absolute risk aversion (CARA), increments in futures prices will result in additional futures sales due to the output effect and speculative effects. The independence of speculation and output decision making is, however, feasible under CARA.