Determination of the Recommended Hedging Ratio

Kahl, Kandice H.

doi:10.2307/1240514

Cited by 105 publications

(45 citation statements)

References 7 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…As the cash price risk increases, the optimal hedge ratio increases. Under the assumptions of production certainty and basis risk, Robinson andBarry (1987), Peck (1975), Kahl (1983), and others found the same result. In this study, however, the Optimal hedge ratio for wheat vs. the cash price variance.…”

Section: Variance Of Cash and Futures Pricesmentioning

confidence: 63%

Optimal hedging under nonlinear borrowing cost, progressive tax rates, and liquidity constraints

Arias¹,

Brorsen

Harri

2000

J. Fut. Mark.

View full text Add to dashboard Cite

Empirical research using optimal hedge ratios usually suggests that producers should hedge much more than they do. In this study, a new theoretical model of hedging is derived. Optimal hedge and leverage ratios and their relationship with yield risk, price variability, basis risk, taxes, and financial risk are determined using alternative assumptions. The motivation to hedge is provided by progressive tax rates and cost of bankruptcy. An empirical example for a wheat and stocker‐steer producer is provided. Results show that there are many factors, often assumed away in the literature, that make farmers hedge little or not at all. Progressive tax rates provide an incentive for farmers to hedge in order to reduce their tax liabilities and increase their after‐tax income. Farmers will hedge when the cost of hedging is less than the benefits of hedging that come from reducing tax liabilities, liquidity costs, or bankruptcy costs. When tax‐loss carryback is allowed, hedging decreases as the amount of tax loss that can be carried back increases. Higher profitability makes benefits from futures trading negligible and hedging unattractive, since farmers move to higher income brackets with near constant marginal tax rates. Increasing basis risk or yield risk also reduce the incentive to hedge. © 2000 John Wiley & Sons, Inc. Jrl Fut Mark 20: 375–396, 2000

show abstract

Section: Variance Of Cash and Futures Pricesmentioning

confidence: 63%

Optimal hedging under nonlinear borrowing cost, progressive tax rates, and liquidity constraints

Arias¹,

Brorsen

Harri

2000

J. Fut. Mark.

View full text Add to dashboard Cite

show abstract

“…This formula is well known in the literature (Kahl, 1983) and is called the standard hedge ratio (Mathews and Holthausen, 1991) [19]. h is a hedge ratio, which is the proportion of the physical position being hedged.…”

Section: Conceptual Frameworkmentioning

confidence: 99%

Cotton Hedging: A Comparison across Developing and Developed Countries

Wang¹,

Chidmi²

2011

View full text Add to dashboard Cite

This paper uses the results of ordinary least squares, bivariate vector autoregressive, and error correction models to estimate the hedge ratios for cotton production across different countries and to determine whether New York Cotton Exchange futures prices can serve as a hedging tool for cotton producers. Models comparison shows that the error correction model fits the data better. The results of the error correction model show that the spot prices and the NYCE futures prices are co-integrated in United States, Australia, and China, but not in Africa Franc Zone countries. In addition, for countries with higher market power, such as US and China, and countries without market distortions, such as Australia, the New York Cotton Exchange futures prices can serve as a hedging tool for cotton producers. In contrast, for less developed countries, such as Africa Franc Zone countries, and Pakistan, the NYCE futures prices cannot serve as hedging tool against the risks faced by cotton farmers.

show abstract

“…The applied economics literature has focused on the use of statistical models of the observed time series of cash and futures prices in hedging. Early development of this type of optimal hedging is found in Johnson (1960), Peck (1975), and Kahl (1983), among others. Typically, this type of hedging considers an agent with a non-tradable position in a cash commodity who plans to buy or sell some number of commodity futures contracts that will maximize her utility.…”

Section: Introductionmentioning

confidence: 97%

Derivative pricing model and time-series approaches to hedging: A comparison

Bryant

Haigh

2005

J. Fut. Mark.

View full text Add to dashboard Cite

This research compares derivative pricing model and statistical time-series approaches to hedging. The finance literature stresses the former approach, while the applied economics literature has focused on the latter. We compare the out-of-sample hedging effectiveness of the two approaches when hedging commodity price risk using futures contracts. For various methods of parameter estimation and inference, we find that the derivative pricing models cannot out-perform a vector error-correction model with a GARCH error structure. The derivative pricing models' unpalatable assumption of deterministically evolving futures volatility seems to impede

show abstract

Determination of the Recommended Hedging Ratio

Cited by 105 publications

References 7 publications

Optimal hedging under nonlinear borrowing cost, progressive tax rates, and liquidity constraints

Optimal hedging under nonlinear borrowing cost, progressive tax rates, and liquidity constraints

Cotton Hedging: A Comparison across Developing and Developed Countries

Derivative pricing model and time-series approaches to hedging: A comparison

Contact Info

Product

Resources

About