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Hedging Risk For Feeder Cattle With A Traditional Hedge Compared To A Ratio Hedge

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  • Elam, Emmett
  • Davis, James

Abstract

This paper compares hedging risk for various weights of feeder cattle hedged with a traditional cross hedge and a ratio cross hedge. A traditional hedge calls for the purchase/sale of one pound of futures for each pound of cash feeder cattle. By contrast, a ratio hedge requires estimation of a hedge ratio to determine the number of pounds of futures needed to hedge one pound of cash feeder cattle. Hedge ratios were found to be larger than 1.0 for light-weight feeder cattle. By using the estimated hedge ratios, it was shown that hedging risk could be reduced 20-50 percent compared to that achieved by using a hedge ratio of 1.0.

Suggested Citation

  • Elam, Emmett & Davis, James, 1990. "Hedging Risk For Feeder Cattle With A Traditional Hedge Compared To A Ratio Hedge," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 22(2), pages 209-216, December.
    • Handle: RePEc:cup:jagaec:v:22:y:1990:i:02:p:209-216_00
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    Cited by:

    1. Maples, William & Harri, Ardian & Riley, John Michael & Tack, Jesse & Williams, Brian, 2016. "Determining the Effectiveness of Exchange Traded Funds as a Risk Management Tool for Southeastern Producers," 2016 Annual Meeting, February 6-9, 2016, San Antonio, Texas 229979, Southern Agricultural Economics Association.
    2. Shafer, Carl E., 1992. "Hedge Ratios and Basis Behavior: An Intuitive Insight?," Faculty Paper Series 257887, Texas A&M University, Department of Agricultural Economics.
    3. Brake, William & Anderson, John D. & Coffey, Brian K., 2006. "Geographic and Seasonal Differences in the Feeder Cattle Hedging Risk," 2006 Annual Meeting, February 5-8, 2006, Orlando, Florida 35325, Southern Agricultural Economics Association.
    4. Diersen, Matthew A. & Klein, Nicole L., 2000. "Price Discovery For Stocker Cattle Futures And Options," 2000 Conference, April 17-18 2000, Chicago, Illinois 18940, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    5. Coffey, Brian K. & Anderson, John D. & Parcell, Joseph L., 2002. "Spatial Analysis Of Feeder Cattle Hedging Risk," 2002 Annual Meeting, July 28-31, 2002, Long Beach, California 36586, Western Agricultural Economics Association.
    6. Bina, Justin D. & Schroeder, Ted C. & Tonsor, Glynn T., 2022. "Conditional feeder cattle hedge ratios: Cross hedging with fluctuating corn prices," Journal of Commodity Markets, Elsevier, vol. 26(C).

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