This paper analyzes production, hedging, and speculative decisions when both futures and options can be used in an expected utility model of price and basis uncertainty. When futures and option prices are unbiased optimal hedging requires only futures (options are redundant). Options are used together with futures as speculative tools when market prices are perceived as biased. Straddles are used to speculate on beliefs about price volatility and to hedge the futures position used to speculate on beliefs about the expected value of the futures price. Mean-variance analysis in general is not consistent with expected utility when options are allowed.

The performance of individual farm yield and area yield crop insurance programs is evaluated for a representative Iowa corn farm using numerical optimization of expected utility and simulation techniques. Several different contract design features are studied, including the nature of the yield index which triggers insurance payouts, alternative restrictions on coverage levels, and alternative pricing structures. Performance is evaluated in terms of impacts on farmer participation and welfare and is examined in a portfolio setting where futures and options are also available to farmers. The relative performance of different crop insurance designs is found to be particularly sensitive to restrictions on coverage levels, the size of premium loadings, and the degree to which individual farm yields are correlated with area yields. Copyright 1998, Oxford University Press.

This paper outlines a model for pricing options when the underlying futures pnce exhibits time-varying volatility. Futures price movements are characterized using a GARCH model. In an empirical application, the GARCH option pricing model predicts market premmms significantly better than the standard Black model, which assumes volatility is constant.