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A Simple Multiperiod Minimum Risk Hedge Model

Author

Listed:
  • Kenneth H. Mathews
  • Duncan M. Holthausen

Abstract

A multiperiod hedging model is developed that is simpler than other multiperiod models in the literature. The model permits periodic adjustment of the hedge while minimizing the producer's profit variance. Minimum risk hedge ratios are calculated for steers, cows, hogs, com, and soybeans using the full model with hedge adjustments every two months. These ratios are compared to those using the model without periodic hedge adjustments and to a simple single-period model. The results suggest that simple models may work well for simple hedges, while the full model is best for more complex hedging situations such as cross hedges.

Suggested Citation

  • Kenneth H. Mathews & Duncan M. Holthausen, 1991. "A Simple Multiperiod Minimum Risk Hedge Model," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 73(4), pages 1020-1026.
    • Handle: RePEc:oup:ajagec:v:73:y:1991:i:4:p:1020-1026.
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    File URL: http://hdl.handle.net/10.2307/1242429
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    Citations

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    Cited by:

    1. Sergio H. Lence & Dermot J. Hayes, 1994. "The Empirical Minimum-Variance Hedge," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 76(1), pages 94-104.
    2. Michael S. Haigh, 2005. "Conditional volatility forecasting in a dynamic hedging model," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 24(3), pages 155-172.
    3. Ni, Jian & Chu, Lap Keung & Wu, Feng & Sculli, Domenic & Shi, Yuan, 2012. "A multi-stage financial hedging approach for the procurement of manufacturing materials," European Journal of Operational Research, Elsevier, vol. 221(2), pages 424-431.
    4. Lien, Donald & Wilson, Bradley K., 2001. "Multiperiod hedging in the presence of stochastic volatility," International Review of Financial Analysis, Elsevier, vol. 10(4), pages 395-406.
    5. Lence, Sergio H., 1996. "Relaxing The Assumptions Of Minimum-Variance Hedging," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 21(1), pages 1-17, July.
    6. Michael S. Haigh & Matthew T. Holt, 2002. "Combining time-varying and dynamic multi-period optimal hedging models," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 29(4), pages 471-500, December.
    7. Haigh, Michael S. & Holt, Matthew T., 1999. "Volatility Spillovers Between Foreign Exchange, Commodity And Freight Futures Prices: Implications For Hedging Strategies," Faculty Paper Series 23997, Texas A&M University, Department of Agricultural Economics.
    8. Donald Lien & Michael Metz, 2001. "Corporate income tax and futures hedging," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 25(3), pages 308-315, September.
    9. Good, Darrel L. & Irwin, Scott H. & Martines-Filho, Joao Gomes & Hagedorn, Lewis A., 2005. "The Pricing Performance of Market Advisory Services in Corn and Soybeans over 1995-2003," AgMAS Project Research Reports 14775, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.

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