Mikhail A. Noussinov (University of Illinois at Urbana- Champaign) Raymond M. Leuthold (University of Illinois at Urbana- Champaign)
Abstract
Multiproduct optimal hedging is compared to alternative hedging strategies as applied to a Midwestern cattle feeder. One-period feeding margin hedge ratios are estimated using weekly cash and futures price data from a simulation of a custom feedlot for 1983-1995. Hedge ratios are estimated using the last 4 years, 6 years, or all prior data available at the moment of estimation; the ratios demonstrate less variability as the length of the underlying sample increases. Hypothesis of all hedge ratios being equal to each other, that leads to the proportional hedging model, is rejected. Means and variances of hedged feeding margins using the computed hedge ratios suggest that there is no consistent domination pattern among the alternative strategies. For the ratios computed based on all prior data available, all strategies are on the efficient frontier, leaving the hedging decision up to the agent's degree of risk aversion. All hedging strategies are shown to significantly reduce the feeding margin's means and variances compared to no hedging, with variance reduction always exceeding 50 percent. Whether a producer chooses multiproduct, single-commodity, or proportional hedge ratios is sensitive to the data set and its size.
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Publisher Info
Paper provided by EconWPA in its series Finance with number
9804004.
Length: 35 pages Date of creation: 17 Apr 1998 Date of revision: Handle: RePEc:wpa:wuwpfi:9804004
Note: Type of Document - pdf; prepared on PC; to print on HP Laser Jet; pages: 35; figures: included. Office for Futures and Options Research (OFOR) at the University of Illinois at Urbana-Champaign. Working Paper 98-02. For a complete list of OFOR working papers see Contact details of provider: Web page: http://129.3.20.41
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