IDEAS home Printed from https://ideas.repec.org/p/isu/genres/5156.html
   My bibliography  Save this paper

Relaxing the Assumptions of Minimum-Variance Hedging

Author

Listed:
  • Lence, Sergio H.

Abstract

The most important minimum-variance hedging ration assumptions are (a) that production is deterministic and (b) that all of the agent’'s wealth is invested in the cash position. Stochastic production greatly reduces optimal hedge ratios. An alternative investment greatly reduces opportunity costs of not hedging by “"diluting"” the cash position. Stochastic production and/or alternative investments render the costs associated with hedging relatively more important, yielding almost negligible net benefits of hedging. Hence, hedging costs typically dismiss in hedging models for being seemingly negligible are important determinants of hedging behavior.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Lence, Sergio H., 1996. "Relaxing the Assumptions of Minimum-Variance Hedging," Staff General Research Papers Archive 5156, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genres:5156
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Sergio H. Lence, 1995. "The Economic Value of Minimum-Variance Hedges," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 77(2), pages 353-364.
    2. Benninga, Simon & Eldor, Rafael & Zilcha, Itzhak, 1983. "Optimal hedging in the futures market under price uncertainty," Economics Letters, Elsevier, vol. 13(2-3), pages 141-145.
    3. Tomek, William G., 1987. "Effects of Futures and Options Trading on Farm Incomes," Staff Papers 186718, Cornell University, Department of Applied Economics and Management.
    4. Sergio H. Lence & Kevin L. Kimle & Marvin L. Hayenga, 1993. "A Dynamic Minimum Variance Hedge," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 75(4), pages 1063-1071.
    5. Kenneth H. Mathews & Duncan M. Holthausen, 1991. "A Simple Multiperiod Minimum Risk Hedge Model," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 73(4), pages 1020-1026.
    6. Kallberg, J. G. & Ziemba, W. T., 1979. "On the robustness of the Arrow-Pratt risk aversion measure," Economics Letters, Elsevier, vol. 2(1), pages 21-26.
    7. Steven C. Blank, 1992. "The significance of hedging capital requirements," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 12(1), pages 11-18, February.
    8. Kroll, Yoram & Levy, Haim & Markowitz, Harry M, 1984. " Mean-Variance versus Direct Utility Maximization," Journal of Finance, American Finance Association, vol. 39(1), pages 47-61, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Townsend, John P. & Brorsen, B. Wade, 2000. "Cost Of Forward Contracting Hard Red Winter Wheat," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 32(01), April.
    2. Sayle, James & Anderson, John D. & Coble, Keith H. & Hudson, Darren, 2006. "Optimal Hedging Strategies for Early-Planted Soybeans in the South," 2006 Annual meeting, July 23-26, Long Beach, CA 21200, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    3. Chen, Sheng-Syan & Lee, Cheng-few & Shrestha, Keshab, 2003. "Futures hedge ratios: a review," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(3), pages 433-465.
    4. Tonsor, Glynn T., 2008. "Hedging in Presence of Market Access Risk," 2008 Conference, April 21-22, 2008, St. Louis, Missouri 37621, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    5. 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.
    6. repec:spr:empeco:v:53:y:2017:i:3:d:10.1007_s00181-016-1146-9 is not listed on IDEAS
    7. Fu, Junhui & Zhang, Wei-Guo & Yao, Zheng & Zhang, Xili, 2012. "Hedging the portfolio of raw materials and the commodity under the mark-to-market risk," Economic Modelling, Elsevier, vol. 29(4), pages 1070-1075.
    8. repec:taf:eurjfi:v:22:y:2016:i:15:p:1534-1560 is not listed on IDEAS
    9. Rocha, Waldemar Antonio da & Caldarelli, Carlos Eduardo, 2010. "The Dynamic Hedging Effectiveness For Soybean Farmers Of Mato Grosso With Futures Contracts Of Bm&F," Organizacoes Rurais e Agroindustriais/Rural and Agro-Industrial Organizations, Universidade Federal de Lavras, Departamento de Administracao e Economia, vol. 12(1).
    10. Jin, Hyun J. & Koo, Won W., 2006. "Offshore hedging strategy of Japan-based wheat traders under multiple sources of risk and hedging costs," Journal of International Money and Finance, Elsevier, vol. 25(2), pages 220-236, March.
    11. Urcola, Hernan A. & Irwin, Scott H., 2006. "Has the Performance of the Hog Options Market Changed?," 2006 Annual meeting, July 23-26, Long Beach, CA 21479, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    12. Mattos, Fabio & Garcia, Philip & Nelson, Carl, 2008. "Relaxing standard hedging assumptions in the presence of downside risk," The Quarterly Review of Economics and Finance, Elsevier, vol. 48(1), pages 78-93, February.
    13. Frechette, Darren L., 2003. "The Potential Value of Agricultural Trade Options," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 32(2), October.
    14. Mattos, Fabio & Garcia, Philip & Pennings, Joost M.E., 2008. "Probability weighting and loss aversion in futures hedging," Journal of Financial Markets, Elsevier, vol. 11(4), pages 433-452, November.
    15. Ardian Harri & John Michael Riley & John D. Anderson & Keith H. Coble, 2009. "Managing economic risk in value-based marketing of fed cattle," Agricultural Economics, International Association of Agricultural Economists, vol. 40(3), pages 295-306, May.
    16. Woodard, Joshua D. & Garcia, Philip, 2007. "Basis Risk and Weather Hedging Effectiveness," 101st Seminar, July 5-6, 2007, Berlin Germany 9254, European Association of Agricultural Economists.
    17. Su, EnDer, 2017. "Stock index hedging using a trend and volatility regime-switching model involving hedging cost," International Review of Economics & Finance, Elsevier, vol. 47(C), pages 233-254.
    18. Thomas Conlon & John Cotter & Ramazan Gençay, 2016. "Commodity futures hedging, risk aversion and the hedging horizon," The European Journal of Finance, Taylor & Francis Journals, vol. 22(15), pages 1534-1560, December.
    19. Frechette, Darren L., 2000. "Hedging With Futures And Options: A Demand Systems Approach," 2000 Conference, April 17-18 2000, Chicago, Illinois 18941, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    20. Pennings, Joost M. E. & Garcia, Philip, 2004. "Hedging behavior in small and medium-sized enterprises: The role of unobserved heterogeneity," Journal of Banking & Finance, Elsevier, vol. 28(5), pages 951-978, May.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:isu:genres:5156. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Curtis Balmer). General contact details of provider: http://edirc.repec.org/data/deiasus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.