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Multiproduct Hedging: Theory, Estimation, and an Application

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  • Paul L. Fackler
  • Kevin P. McNew

Abstract

Theoretical and empirical approaches to multiple product commodity hedging are discussed, clarifying and extending previous results. Tests of hypotheses concerning optimal hedging effectiveness are discussed. Empirical estimates of optimal hedges for central Illinois soybean processors are computed. Multiproduct optimal hedge positions provide significant risk reductions relative to simpler approaches.

Suggested Citation

  • Paul L. Fackler & Kevin P. McNew, 1993. "Multiproduct Hedging: Theory, Estimation, and an Application," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 15(3), pages 521-535.
    • Handle: RePEc:oup:revage:v:15:y:1993:i:3:p:521-535.
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    File URL: http://hdl.handle.net/10.2307/1349486
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    1. Liu, Pan & Vedenov, Dmitry & Power, Gabriel J., 2017. "Is hedging the crack spread no longer all it's cracked up to be?," Energy Economics, Elsevier, vol. 63(C), pages 31-40.
    2. Leuthold, Raymond M. & Noussinov, Mikhail A., 1999. "Optimal Hedging Strategies For The U.S. Cattle Feeder," Journal of Agribusiness, Agricultural Economics Association of Georgia, vol. 17(1), pages 1-19.
    3. Haarstad, Aleksander H. & Lavrutich, Maria & Strypet, Kristian & Strøm, Eivind, 2022. "Multi-commodity price risk hedging in the Atlantic salmon farming industry," Journal of Commodity Markets, Elsevier, vol. 25(C).
    4. Power, Gabriel J. & Vedenov, Dmitry, 2023. "Who's afraid of a Texas hedge?," Energy Economics, Elsevier, vol. 127(PB).
    5. Fei, Chengcheng & Vedenov, Dmitry & Stevens, Reid B. & Anderson, David, 2021. "Single-Commodity vs. Joint Hedging in Cattle Feeding Cycle: Is Joint Hedging Always Essential?," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 46(3), September.
    6. Haigh, Michael S. & Holt, Matthew T., 1999. "Volatility Spillovers Between Foreign Exchange, Commodity And Freight Futures Prices: Implications For Hedging Strategies," Faculty Paper Series 23997, Texas A&M University, Department of Agricultural Economics.
    7. Białkowski, Jędrzej & Bohl, Martin T. & Perera, Devmali, 2023. "Commodity futures hedge ratios: A meta-analysis," Journal of Commodity Markets, Elsevier, vol. 30(C).
    8. Dahlgran, Roger A., 2007. "Inventory and Transformation Hedging Effectiveness in Corn Crushing," 2007 Conference, April 16-17, 2007, Chicago, Illinois 37557, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    9. Rahman, Shaikh Mahfuzur & Dorfman, Jeffrey H. & Turner, Steven C., 2004. "A Bayesian Approach to Optimal Cross-Hedging of Cottonseed Products Using Soybean Complex Futures," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 29(2), pages 1-16, August.
    10. Mark R. Manfredo & Raymond M. Leuthold, 1998. "Agricultural Applications of Value-at-Risk Analysis: A Perspective," Finance 9805002, University Library of Munich, Germany.
    11. Lence, Sergio H., 1996. "Relaxing The Assumptions Of Minimum-Variance Hedging," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 21(1), pages 1-17, July.
    12. Ahmedov, Zafarbek & Woodard, Joshua D., 2012. "Do RIN Mandates and Blender's Tax Credit Affect Blenders' Hedging Strategies?," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124980, Agricultural and Applied Economics Association.
    13. Ali E. Abbas & James E. Matheson & Robert F. Bordley, 2009. "Effective utility functions induced by organizational target-based incentives," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 30(4), pages 235-251.
    14. Rozaimah Zainudin & Roselee Shah Shaharudin, 2011. "Multi Mean Garch Approach to Evaluating Hedging Performance in the Crude Palm Oil Futures Market," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 7(1), pages 111-130.
    15. Jędrzej Białkowski & Martin T. Bohl & Devmali Perera, 2022. "Commodity Futures Hedge Ratios: A Meta-Analysis," Working Papers in Economics 22/12, University of Canterbury, Department of Economics and Finance.
    16. Mikhail A. Noussinov & Raymond M. Leuthold, 1998. "Optimal Hedging Strategies for the U.S. Cattle Feeder," Finance 9804004, University Library of Munich, Germany.
    17. Joost M. E. Pennings & Matthew T. G. Meulenberg, 1998. "New Futures Markets in Agricultural Production Rights: Possibilities and Constraints for the British and Dutch Milk Quota Markets," Journal of Agricultural Economics, Wiley Blackwell, vol. 49(1), pages 50-66, March.
    18. Wesley N. Musser & George F. Patrick & David T. Eckman, 1996. "Risk and Grain Marketing Behavior of Large-Scale Farmers," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 18(1), pages 65-77.
    19. Manfredo, Mark R. & Garcia, Philip & Leuthold, Raymond M., 2000. "Time-Varying Multiproduct Hedge Ratio Estimation In The Soybean Complex: A Simplified Approach," 2000 Conference, April 17-18 2000, Chicago, Illinois 18933, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    20. Dahlgran, Roger A., 2009. "Inventory and Transformation Hedging Effectiveness in Corn Crushing," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 34(1), pages 1-18, April.
    21. Yun, Won-Cheol & Jae Kim, Hyun, 2010. "Hedging strategy for crude oil trading and the factors influencing hedging effectiveness," Energy Policy, Elsevier, vol. 38(5), pages 2404-2408, May.
    22. Vedenov, Dmitry & Power, Gabriel J., 2022. "We don't need no fancy hedges! Or do we?," International Review of Financial Analysis, Elsevier, vol. 81(C).
    23. Morgunov, V.I. (Моргунов, В.И.), 2016. "The Liquidity Management of the Banking Sector and the Short-Term Money Market Interest Rates [Управление Ликвидностью Банковского Сектора И Краткосрочной Процентной Ставкой Денежного Рынка]," Working Papers 21311, Russian Presidential Academy of National Economy and Public Administration.
    24. Dahlgran, Roger A., 2005. "Hedging Cash Flows from Commodity Processing," 2005 Conference, April 18-19, 2005, St. Louis, Missouri 19046, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.

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