In this paper, we treat output as a decision variable. Moreover, we employ a general form of basis risk. Furthermore, we relax the statistical-independence assumption between the spot price and basis risk.

In this paper we present two dynamic models of background risk. We first present a stochastic factor model with an additive background risk. Thereafter, we present a dynamic model of simultaneous (correlated) multiplicative background risk and additive background risk. In so doing, we use a...