Forward Hedging Under Price and Production Risk of Wheat
AbstractThis paper estimates optimal hedging ratios for a Finnish spring wheat producer under price and yield risk. The forward contract available for hedging fixes the price and quantity at the time of sowing for a delivery at harvest. Autoregressive models are used to obtain point forecasts for the conditional mean price and price volatility at harvest. Expected yield and yield volatility are estimated from the field experiment data. A range of coefficients of absolute risk aversion are used in the computations. The results suggest that yield volatility is large and it dominates the price volatility in the optimal hedging decisions of the Finnish wheat producers. Nevertheless, a potential for large negative correlation between the price and the yield decreases the optimal hedging ratio since the Finnish farmers do not have access to selling put options when they enter in a forward contract.
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Bibliographic InfoPaper provided by European Association of Agricultural Economists in its series 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark with number 24467.
Date of creation: 2005
Date of revision:
hedging ratio; risk; forward contract; Financial Economics; Risk and Uncertainty; Q14;
Find related papers by JEL classification:
- Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance
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