Hedgers located far from organized commodity exchanges suffer the mismatch between their local prices and exchange prices. Futures and options traded on the exchange may still be valuable to distant hedgers but only to the extent that basis risk is small. Forward contracting allows hedgers to...

This paper discusses some of the failings of expected utility including the Allais paradox and expected utility's inadequate one dimensional characterization of risk. Three alternatives to expected utility are discussed at length; weighted expected utility, rank dependent utility, and cumulative...

Standard models of hedging behavior assume that either hedgers wish to minimize net price variation or they wish to balance variation versus profits. These models treat variation as risk and fail to distinguish between variation that is random and variation that is not random over time. Newer...

We derive a new hedge ratio based on weighted expected utility. Weighted expected utility is a generalization of expected utility that permits non-linear probability weights. Generally speaking weighted expected utility hedge ratios are less than minimum variance hedge ratios and larger than...