| Abstract: | The effects of hedging and time-dependent price and geological uncertainty on the behavior of a firm exploiting a nonrenewable natural resource are derived. Contrasts in behavior with and without hedging and uncertainty are identified and discussed. Much of the analysis centers on the firm's implicit value of its in situ reserves, marginal user cost. The main result is that time-dependent uncertainty lowers the implicit value of reserves. Hedging ameliorates this effect somewhat. Under some conditions even with risk reducing hedging, the firm tilts its extraction and development paths toward the present and may also shorten its decision-making time horizon. |
