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Risk Management Using Futures Contracts: The Impact of Spot Market Contracts and Production Horizons on the Optimal Hedge Ratio

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Author Info
Kuwornu, John K.M.
Kuiper, W. Erno
Pennings, Joost M.E.
Meulenberg, Matthew T.G.

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Abstract

We specify a principal-agent marketing channel involving producers, wholesalers, retailers and a futures market. Our hedge ratio for producers appears to be much lower than the common price-risk minimising ones as we account for producers’ vertical contracts and, by using annual data, their production horizon. The Dutch ware potato marketing channel and its futures market in Amsterdam show that possibly through decreases in producers’ and wholesalers’ risk aversions, their optimal dynamic hedge ratios decreased from 38% and 12%, respectively, in 1982 to 18% and 10%, respectively, in 2003. These results comply with the decreased futures volume traded in Amsterdam over the years.

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Publisher Info
Paper provided by European Association of Agricultural Economists in its series 99th Seminar, February 8-10, 2006, Bonn, Germany with number 7755.

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Date of creation: 2006
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Handle: RePEc:ags:eaae99:7755

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Related research
Keywords: Principal-Agent Model; Risk Management; Futures and Spot Market Contracts; Production Horizons; Food Marketing Channels; Marketing; Risk and Uncertainty;

References listed on IDEAS
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  1. Moschini, Giancarlo & Lapan, Harvey, 1995. "The Hedging Role of Options and Futures under Joint Price, Basis, and Production Risk," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 1025-49, November. [Downloadable!] (restricted)
  2. Askari, Hossein & Cummings, John Thomas, 1977. "Estimating Agricultural Supply Response with the Nerlove Model: A Survey," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(2), pages 257-92, June. [Downloadable!] (restricted)
  3. W. Erno Kuiper & Joost M. E. Pennings, 2002. "Identification by full adjustment: evidence from the relationship between futures and spot prices," European Review of Agricultural Economics, Oxford University Press for the Foundation for the European Review of Agricultural Economics, vol. 29(1), pages 67-84, March.
  4. Ederington, Louis H, 1979. "The Hedging Performance of the New Futures Markets," Journal of Finance, American Finance Association, vol. 34(1), pages 157-70, March. [Downloadable!] (restricted)
  5. P. J. Dawson & A. L. Tiffin & B. White, 2000. "Optimal Hedging Ratios for Wheat and Barley at the LIFFE: A GARCH Approach," Journal of Agricultural Economics, Blackwell Publishing, vol. 51(2), pages 147-161. [Downloadable!] (restricted)
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