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Abstract
This paper examines the hedging behavior of a risk-averse individual who faces uncertainty in spot-market prices and has a state-dependent utility function. The model demonstrates how risk aversion, state-dependency of preferences, and dependence structure of spot-market prices and states of nature jointly determine the individual’s optimal hedge position. We stipulate two sets of necessary and sufficient conditions, one on the utility function and the other on the dependence structure of spot-market prices and states of nature, which yield the celebrated full-hedging theorem originally derived under state-independent preferences.
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