Farmer's risk-balancing, consumption and optimal debt level

• Main Author: Esguerra, Almira Jazmin P.
• Format: text
• Language: English
• Published: Animo Repository 2009
• Subjects: Financial risk; Agricultural credit; Rate of return; Agriculture and state; Economics
• Online Access: https://animorepository.dlsu.edu.ph/etd_masteral/6955
• Institution: De La Salle University

This paper presents a stochastic optimal control/dynamic program- ming (SOC/DP) approach to derive the optimal debt level and consump- tion in farm models concerning two sources of undertainty: the return on assets and real interest rate. The SOC/DP analytic framework is used to analyze the impacts of risk-reducing farm policies on farm's financial and risk adjustments. The results show a violation of the risk-balancing concept, which theorizes that risk-reducing farm policies may lead to in- creases in financial leverage, total risk, and the expected returns. Also, this study examines the extent to which the estimates of the optimal debt level are biased when interest rate risk is ignored.