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Risk Management Using Futures Contracts: The Impact of Spot Market Contracts and Production Horizons on the Optimal Hedge Ratio

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  • Kuwornu, John K.M.
  • Kuiper, W. Erno
  • Pennings, Joost M.E.
  • Meulenberg, Matthew T.G.

Abstract

We specify a principal-agent marketing channel involving producers, wholesalers, retailers and a futures market. Our hedge ratio for producers appears to be much lower than the common price-risk minimising ones as we account for producers' vertical contracts and, by using annual data, their production horizon. The Dutch ware potato marketing channel and its futures market in Amsterdam show that possibly through decreases in producers' and wholesalers' risk aversions, their optimal dynamic hedge ratios decreased from 38% and 12%, respectively, in 1982 to 18% and 10%, respectively, in 2003. These results comply with the decreased futures volume traded in Amsterdam over the years.

Suggested Citation

  • Kuwornu, John K.M. & Kuiper, W. Erno & Pennings, Joost M.E. & Meulenberg, Matthew T.G., 2006. "Risk Management Using Futures Contracts: The Impact of Spot Market Contracts and Production Horizons on the Optimal Hedge Ratio," 99th Seminar, February 8-10, 2006, Bonn, Germany 7755, European Association of Agricultural Economists.
    • Handle: RePEc:ags:eaae99:7755
    DOI: 10.22004/ag.econ.7755
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    References listed on IDEAS

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    1. Marc Nerlove, 1958. "Adaptive Expectations and Cobweb Phenomena," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 72(2), pages 227-240.
    2. Moschini, Giancarlo & Lapan, Harvey, 1995. "The Hedging Role of Options and Futures under Joint Price, Basis, and Production Risk," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 1025-1049, November.
    3. W. Erno Kuiper & Joost M. E. Pennings, 2002. "Identification by full adjustment: evidence from the relationship between futures and spot prices," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 29(1), pages 67-84, March.
    4. Askari, Hossein & Cummings, John Thomas, 1977. "Estimating Agricultural Supply Response with the Nerlove Model: A Survey," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(2), pages 257-292, June.
    5. Joost M. E. Pennings & Matthew T. G. Meulenberg, 1997. "The hedging performance in new agricultural futures markets: A note," Agribusiness, John Wiley & Sons, Ltd., vol. 13(3), pages 295-300.
    6. P. J. Dawson & A. L. Tiffin & B. White, 2000. "Optimal Hedging Ratios for Wheat and Barley at the LIFFE: A GARCH Approach," Journal of Agricultural Economics, Wiley Blackwell, vol. 51(2), pages 147-161, May.
    7. Ederington, Louis H, 1979. "The Hedging Performance of the New Futures Markets," Journal of Finance, American Finance Association, vol. 34(1), pages 157-170, March.
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    Cited by:

    1. Endro Gunawan & John K. M. Kuwornu & Avishek Datta & Loc T. Nguyen, 2019. "Farmers’ Perceptions of the Warehouse Receipt System in Indonesia," Sustainability, MDPI, vol. 11(6), pages 1-21, March.

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    Marketing; Risk and Uncertainty;

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