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Basis Risk And Hedging Strategies For Australian Wheat Exports

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  • Gary E. Bond
  • Stanley R. Thompson
  • Jane M. Geldard

Abstract

Basis risk can play a significant role in the determination of effective hedging strategies. In this paper a portfolio framework is developed to examine the effect of basis risk on hedging strategies for Australian wheat exports. Monthly data for the period 1977 to 1984 were used to implement the analytical framework. While the traditional definition of hedging implies a hedge ratio of unity, the results of this research show that the average ratio of optimal hedge to stockholding is well below unity. Evolving market conditions can also cause the optimal hedge ratio to vary substantially over time.
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Suggested Citation

  • Gary E. Bond & Stanley R. Thompson & Jane M. Geldard, 1985. "Basis Risk And Hedging Strategies For Australian Wheat Exports," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 29(3), pages 199-209, December.
    • Handle: RePEc:bla:ajarec:v:29:y:1985:i:3:p:199-209
    DOI: j.1467-8489.1985.tb00444.x
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    References listed on IDEAS

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    1. Peter Berck, 1981. "Portfolio Theory and the Demand for Futures: The Case of California Cotton," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 63(3), pages 466-474.
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    7. Gary E. Bond & Stanley R. Thompson, 1985. "Risk Aversion and the Recommended Hedging Ratio," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 67(4), pages 870-872.
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    Cited by:

    1. Prehn, Sören & Feil, Jan-Henning, 2017. "Why millers prefer to hedge at the KCBoT and grain elevator operators at the CBoT," 2017 International Congress, August 28-September 1, 2017, Parma, Italy 261262, European Association of Agricultural Economists.
    2. Blank, Steven C., 1989. "Research On Futures Markets: Issues, Approaches, And Empirical Findings," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 14(1), pages 1-14, July.
    3. Simmons, Phil, 1999. "Does Separation Theorem Explain Why Farmers Have So Little Interest In Futures Markets?," Working Papers 12933, University of New England, School of Economics.
    4. Simmons, Phil & Rambaldi, Alicia N., 1997. "Potential demand for hedging by Australian wheat producers," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 41(2), pages 1-12.
    5. Carter, Colin A., 1999. "Commodity futures markets: a survey," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 43(2), pages 1-39, June.
    6. Frechette, Darren L., 2000. "Hedging With Futures And Options: A Demand Systems Approach," 2000 Conference, April 17-18 2000, Chicago, Illinois 18941, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    7. Hegde, S. Aaron, 2004. "An Economic History Of The Failure Of Broiler Futures," 2004 Annual meeting, August 1-4, Denver, CO 20397, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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