Statistics as a tool to mitigate price risk on cattle hedging

Thales de Lima Silva and Ana Flávia Gouveia de Faria

Revista IPecege, 2016, vol. 2, issue 1

Abstract: The objective of this work was to demonstrate the use of statistics as a tool to minimize risk in cattle hedging operations , based on the historical price series in the city of Itapetinga in the state of Bahia. Prices in the futures market were obtained from the Center for Advanced Studies in Applied Economics [CEPEA] Esalq/USP. Prices in the physical market were obtained from the Secretariat of Agriculture, Livestock, Irrigation, Fisheries and Aquaculture [SEAGRI-BA]. The correlation between prices in the physical and futures markets was calculated to determine how much the variation in one follows the variation in the other. Basis values ​​were calculated for all days of the analyzed period, and then the mean and standard deviation of the basis values ​​were found. Having determined the basis risk of the hedging operations , using the standard normal distribution table as a reference, daily purchase and sale contracts were simulated over a one-year period, using the concept of basis cost to determine the target price, thus increasing the security of the operations. In practice, it has been suggested to close some positions and take on others as the market moves in favor of or against the hedge position . In this way, hedging strategies in futures markets prove to be excellent options for protecting against fluctuations in cattle prices.

Keywords: Livestock; Production/Industries (search for similar items in EconPapers)
Date: 2016
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