HEDGING WITH FUTURES AND OPTIONS UNDER A TRUNCATED CASH PRICE DISTRIBUTION

Steven D. Hanson, Robert Myers () and James Hilker ()

Journal of Agricultural and Applied Economics, 1999, vol. 31, issue 3, 11

Abstract: Many agricultural producers face cash price distributions that are effectively truncated at a lower limit through participation in farm programs designed to support farm prices and incomes. For example, the 1996 Federal Agricultural Improvement Act (FAIR) makes many producers eligible to obtain marketing loans which truncate their cash price realization at the loan rate, while allowing market prices to freely equilibrate supply and demand. This paper studies the effects of truncated cash price distributions on the optimal use of futures and options. The results show that truncation in the cash price distribution facing an individual producer provides incentives to trade options as well as futures. We derive optimal futures and options trading rules under options as well as futures. We derive optimal futures and options trading rules under a range of different truncation scenarios. Empirical results highlights the impacts of basis risk and yield risk on the optimal futures and options portfolio.

Keywords: Marketing (search for similar items in EconPapers)
Date: 1999
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://ageconsearch.umn.edu/record/15152/files/31030449.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ags:joaaec:15152

DOI: 10.22004/ag.econ.15152

Access Statistics for this article

More articles in Journal of Agricultural and Applied Economics from Southern Agricultural Economics Association Contact information at EDIRC.
Bibliographic data for series maintained by AgEcon Search ().