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Optimal Hedge Ratios with Risk-Neutral Producers and Nonlinear Borrowing Costs

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  • B. Wade Brorsen

Abstract

A new theory of hedging is derived assuming producers are risk neutral, forward pricing is costly, and borrowing costs are nonlinear. The standard risk-minimizing hedge ratio is derived when forward pricing is costless. When the assumption of costless hedging is dropped, high-leveraged firms are shown to hedge more than do low-leveraged firms. If the value of capital is uncorrelated with output price, firms are shown to hedge more as cash price variability increases. Thus, the model can be consistent with what firms actually do.

Suggested Citation

  • B. Wade Brorsen, 1995. "Optimal Hedge Ratios with Risk-Neutral Producers and Nonlinear Borrowing Costs," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 77(1), pages 174-181.
    • Handle: RePEc:oup:ajagec:v:77:y:1995:i:1:p:174-181.
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    File URL: http://hdl.handle.net/10.2307/1243899
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    Cited by:

    1. Andrea E. Woolverton & Michael E. Sykuta, 2009. "Do Income Support Programs Impact Producer Hedging Decisions? Evidence from a Cross-Country Comparative," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 31(4), pages 834-852, December.
    2. Cordier, Jean, 1996. "Les marchés dérivés de produits agricoles. Présentation et perspectives de développement dans l'Union européenne," Cahiers d'Economie et de Sociologie Rurales (CESR), Institut National de la Recherche Agronomique (INRA), vol. 41.
    3. Deane, Paul & Malcolm, Bill, 2006. "Do Australian woolgrowers manage price risk rationally?," AFBM Journal, Australasian Farm Business Management Network, vol. 3(2), pages 1-7.
    4. Power, Gabriel J. & Vedenov, Dmitry V., 2008. "The Shape of the Optimal Hedge Ratio: Modeling Joint Spot-Futures Prices using an Empirical Copula-GARCH Model," 2008 Conference, April 21-22, 2008, St. Louis, Missouri 37609, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    5. David J. Pannell & Getu Hailu & Alfons Weersink & Amanda Burt, 2008. "More reasons why farmers have so little interest in futures markets," Agricultural Economics, International Association of Agricultural Economists, vol. 39(1), pages 41-50, July.
    6. Mofokeng, Maine & Vink, Nick, 2013. "Factors Affecting the Hedging Decision of Maize Farmers in Gauteng Province," 2013 Fourth International Conference, September 22-25, 2013, Hammamet, Tunisia 161465, African Association of Agricultural Economists (AAAE).
    7. 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.
    8. Simmons, Phil, 2002. "Why do farmers have so little interest in futures markets?," Agricultural Economics, Blackwell, vol. 27(1), pages 1-6, May.
    9. Choudhry, Taufiq, 2009. "Short-run deviations and time-varying hedge ratios: Evidence from agricultural futures markets," International Review of Financial Analysis, Elsevier, vol. 18(1-2), pages 58-65, March.
    10. Lin, Hua & Fortenbery, T. Randall, 2006. "Risk Premiums and the Storage of Agricultural Commodities," Staff Papers 10277, University of Wisconsin-Madison, Department of Agricultural and Applied Economics.
    11. Ricome, Aymeric & Chaib, Karim & Ridier, Aude & Kephaliacos, Charilaos & Carpy-Goulard, Francoise, 2012. "The role of cash crop marketing contracts in the adoption of low-input practices in the presence of risk and income supports," 126th Seminar, June 27-29, 2012, Capri, Italy 126222, European Association of Agricultural Economists.
    12. Garcia, Philip & Nelson, Carl H., 2003. "Engaging Students In Research: The Use Of Structured Professional Dialogue," 2003 Annual meeting, July 27-30, Montreal, Canada 21894, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    13. Atwood, Joseph A. & Buschena, David E., 2003. "Evaluating the magnitudes of financial transactions costs on risk behavior," Agricultural Systems, Elsevier, vol. 75(2-3), pages 235-249.
    14. Philip Garcia & Carl H. Nelson, 2003. "Engaging Students in Research: The Use of Professional Dialogue," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 25(2), pages 569-577.
    15. Tomek, William G. & Peterson, Hikaru Hanawa, 2000. "Risk Management In Agricultural Markets: A Survey," 2000 Producer Marketing and Risk Management Conference, January 13-14, Orlando, FL 19580, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    16. 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.

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