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From Hedging to Pure Speculation: A Micro Model of Optimal Futures and Cash Market Positions

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  • Ronald W. Ward
  • Lehman B. Fletcher

Abstract

A theoretical model of optimal firm decisions in cash and futures markets that includes both primary product producers and marketing firms is presented. The generalized model of production and marketing decisions under risk is applied to both short and long hedging and speculation. Hedging and speculation are given precise definitions. Speculation exists when a firm's futures position exceeds the 100 percent hedging level or when it does not provide hedging possibilities in conjunction with the cash market position. Comparisons between hedging on futures markets and forward contracting are made. Live beef futures are used to show how transformation costs for nonstorable commodities should be treated in the same manner as storage costs for storable commodities.

Suggested Citation

  • Ronald W. Ward & Lehman B. Fletcher, 1971. "From Hedging to Pure Speculation: A Micro Model of Optimal Futures and Cash Market Positions," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 53(1), pages 71-78.
    • Handle: RePEc:oup:ajagec:v:53:y:1971:i:1:p:71-78.
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    File URL: http://hdl.handle.net/10.2307/3180299
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    Citations

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    Cited by:

    1. Arshanapalli, Bala G. & Gupta, Omprakash K., 1996. "Optimal hedging under output price uncertainty," European Journal of Operational Research, Elsevier, vol. 95(3), pages 522-536, December.
    2. Goss, Barry A., 1980. "Aspects Of Hedging Theory," Australian Journal of Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 24(3), pages 1-14, December.
    3. Dubman, Robert W. & Miller, Bill R., 1987. "Forward Contracting With Uncertain Input Supplies: A Risk Programming Approach," 1987 Annual Meeting, August 2-5, East Lansing, Michigan 270130, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    4. King, Robert P., 1979. "Operational Techniques for Applied Decision Analysis Under Uncertainty," AAEA Fellows - Dissertations and Theses, Agricultural and Applied Economics Association, number 181951, December.
    5. Michaël Dewally & Luke Marriott, 2008. "Effective Basemetal Hedging: The Optimal Hedge Ratio and Hedging Horizon," JRFM, MDPI, vol. 1(1), pages 1-36, December.
    6. Tronstad, Russell, 1989. "Optimal Cash Grain Sale, Storage, and Hedging Decisions for Grain Producers: A Stochastic Dynamic Programming Analysis," 1989 Annual Meeting, July 30-August 2, Baton Rouge, Louisiana 270518, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    7. Dubman, Robert W., 1988. "Establishing Peanut Purchasing Contract Terms With Uncertain Market Prices And Input Supplies," Journal of Food Distribution Research, Food Distribution Research Society, vol. 19(1), pages 1-14, February.
    8. Stückler, Maria, 2002. "Handel auf Terminkontraktmärkten," Department of Economics Working Paper Series 80, WU Vienna University of Economics and Business.
    9. Tabesh, Hamid, 1987. "Hedging price risk to soybean producers with futures and options: a case study," ISU General Staff Papers 1987010108000010306, Iowa State University, Department of Economics.
    10. Cifarelli, Giulio & Paladino, Giovanna, 2015. "A dynamic model of hedging and speculation in the commodity futures markets," Journal of Financial Markets, Elsevier, vol. 25(C), pages 1-15.
    11. Buccola, Steven T. & French, Ben C., 1977. "An E-V Analysis Of Pricing Alternatives For Long-Term Marketing Contracts," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, vol. 9(2), pages 1-7, December.
    12. Paul, Allen B., 1989. "Research On Futures Markets: Discussion," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 14(1), pages 1-3, July.
    13. Paul, Allen B., 1976. "Treatment of Hedging in Commodity Market Regulation," Technical Bulletins 158109, United States Department of Agriculture, Economic Research Service.
    14. Buccola, Steven T., 1980. "Supply And Demand Considerations Of Agribusiness Marketing Portfolios," 1980 Annual Meeting, July 27-30, Urbana-Champaign, Illinois 278474, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    15. Holland, David W. & Purcell, Wayne D. & Hague, Terry, 1972. "Mean-Variance Analysis Of Alternative Hedging Strategies," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, vol. 4(1), pages 1-6, July.
    16. Cifarelli, Giulio, 2013. "Smooth transition regime shifts and oil price dynamics," Energy Economics, Elsevier, vol. 38(C), pages 160-167.
    17. Ward, Ronald W. & Schimkat, Gregory E., 1979. "Risk Ratios And Hedging: Florida Feeder Cattle," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, vol. 11(1), pages 1-7, July.
    18. Maria Stückler, 2002. "Handel auf Terminkontraktmärkten," Department of Economics Working Papers wuwp080, Vienna University of Economics and Business, Department of Economics.
    19. Lanier, Eleanor B., 1972. "Economics of Agriculture: Reports and Publications Issued or Sponsored by USDA's Economic Research Service, July 1970-June 1971," Miscellaneous Publications 321803, United States Department of Agriculture, Economic Research Service.

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