Evaluating the Hedging Potential of the Lean Hog Futures Contract
The lean hog futures contract is replacing the live hog futures contract at the Chicago Mercantile Exchange beginning with the February 1997 contract. The lean hog futures will be cash settled based on a broad-based lean hog price index, eliminating terminal markets from the price discovery process. Using this index over a twenty-month period as a proxy for the lean hog futures price, this paper compares the hedging effectiveness of the live hog futures contract to the hedging potential of the lean hog futures contract for cash live hogs as well as four cash meat cuts. Frozen pork bellies futures are also examined for the cash meats. Both long-term and short-term hedges are simulated, using the minimum-variance approach, which utilizes only unconditional information, and the Myers-Thompson approach that incorporates conditional information. The results show that the lean hog futures should perform better than either the live hog or the frozen pork bellies futures as a hedging instrument for Omaha cash hogs and cash loins. The strongest evidence of this is for the short-term hedging of cash hogs. For the other three meats, no futures contract demonstrated a clear hedging advantage.
|Date of creation:||23 Sep 1996|
|Date of revision:|
|Note:||Type of Document - Word Perfect 6.1; prepared on PC; to print on HP Laser Jet 4; pages: 23. Office for Futures and Options Research (OFOR) at the University of Illinois, Urbana-Champaign. Working Paper 96-03. For a complete list of OFOR working papers see|
|Contact details of provider:|| Web page: http://econwpa.repec.org|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hayenga, Marvin L. & DiPietre, Dennis D., 1982. "Cross-Hedging Wholesale Pork Products Using Live Hog Futures," Staff General Research Papers 11305, Iowa State University, Department of Economics.
- Hayenga, Marvin L. & Jiang, B. & Kweon, J. H. & Lence, Sergio H., 1994. "Cross Hedging Wholesale Beef and Pork Products," Staff General Research Papers 11399, Iowa State University, Department of Economics.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpfi:9609003. 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: (EconWPA)
If references are entirely missing, you can add them using this form.