HEDGING WITH FUTURES AND OPTIONS: A DEMAND SYSTEMS APPROACH

Darren L. Frechette

No 18941, 2000 Conference, April 17-18 2000, Chicago, Illinois from NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management

Abstract: The optimal hedging portfolio is shown to include both futures and options under a variety of circumstances when the marginal cost of hedging is non-zero. Futures and options are treated as substitute goods, and properties of the resulting hedging demand system are explained. The overall optimal hedge ratio is shown to increase when the marginal cost of trading options is reduced. The overall optimal hedge ratio is shown to decrease when the marginal cost of trading futures is decreased. The implication is that hedging demand can be stimulated by reducing the perceived cost of trading options, by educating hedgers about options and by initiating programs like the Dairy Options Pilot Program. The demand systems approach is applied to estimate optimal hedge ratios for dairy producers hedging corn inputs in five regions of Pennsylvania.

Keywords: Marketing (search for similar items in EconPapers)
Pages: 23
Date: 2000
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Persistent link: https://EconPapers.repec.org/RePEc:ags:ncrtci:18941

DOI: 10.22004/ag.econ.18941

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