Relaxing standard hedging assumptions in the presence of downside risk
The purpose of this study is to analyze how the introduction of a downside risk measure and less restrictive assumptions can change the optimal hedge ratio in the standard hedging problem. Based on a dataset of futures and cash prices for soybeans in the U.S., the empirical findings indicate that optimal hedge ratios change dramatically when a one-sided risk measure is adopted and standard assumptions are relaxed. Further, the results suggest that in a downside risk framework with realistic hedging assumptions there is little or no incentive for farmers to hedge.
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