[After devising expectational measures of production and price uncertainty, this paper presents a model that derives an optimal hedging strategy for a producing country that is subject to variability in both the price and the production of its output. The analysis is then used to derive the optimal hedging for representative cocoa producers of Ghana, Nigeria, Ivory Coast, and Brazil, four countries which account for close to 80 percent of world production. While the traditional definition of hedging recommends a hedge ratio of one, this paper shows that the ratio of optimal hedge to expected output should be below unity. To arrive at this result, individual preferences are represented by a logarithmic utility function (and also by a quadratic utility function for values of the risk parameter which are inferior to 0.001). Thus, limited usage of the futures market may be superior to a full short hedge of expected output when there is production variability. This result is a warning for developing countries whose agricultural produce is subject to high price and quantity volatility and should aid them in deciding upon the use of futures trading as a hedging instrument.]

After devising expectational measures of production and price uncertainty, this paper presents a model that derives an optimal hedging strategy for a producing country that is subject to variability in both the price and the production of its output. The analysis is then used to derive the optimal hedging for representative cocoa producers of Ghana, Nigeria, Ivory Coast, and Brazil, four countries which account for close to 80 percent of world production. While the traditional definition of hedging recommends a hedge ratio of one, this paper shows that the ratio of optimal hedge to expected output should be below unity. To arrive at this result, individual preferences are represented by a logarithmic utility function (and also by a quadratic utility function for values of the risk parameter which are inferior to 0.001). Thus, limited usage of the futures market may be superior to a full short hedge of expected output when there is production variability. This result is a warning for developing countries whose agricultural produce is subject to high price and quantity volatility and should aid them in deciding upon the use of futures trading as a hedging instrument.

This paper examines one of the few cases of seemingly redundant securities: sets of three government bonds with the same maturity date. Within the bounds on relative bond prices established by tax-exempt investors in a market with proportional transaction costs, the taxation of capital gains on the basis of realization has a significant impact on relative prices. The empirical evidence supports the tax option effect discussed by Constantinides and Ingersoll, but does not generally support the segmented tax-clientele equilibrium discussed by Schaefer.

Nestor Gonzalez, Robert Litzenberger, Jacques Rolfo, On Mean Variance Models of Capital Structure and the Absurdity of their Predictions, The Journal of Financial and Quantitative Analysis, Vol. 12, No. 2 (Jun., 1977), pp. 165-179

It is shown that coupon bonds alone are not sufficient to span time‐dated claims on ordinary income, capital gains, and non‐taxable wealth. In an incomplete bond market where the pure dated claims are not spanned by existing bonds, marginal rates of substitution between present consumption and pure dated claims on ordinary income, capital gains income, and non‐taxable wealth, respectively, can differ across bondholders. However, the relative pricing of coupon bonds in each of these countries is shown to be consistent with the tax status of the major (non‐tax‐exempt) holders of government debt.