HEDGING RISK FOR FEEDER CATTLE WITH A TRADITIONAL HEDGE COMPARED TO A RATIO HEDGE

Emmett W. Elam and James Davis

Southern Journal of Agricultural Economics, 1990, vol. 22, issue 2, 8

Abstract: This paper compares hedging risk for various weights of feeder cattle hedged with a traditional cross hedge and a ratio cross hedge. A traditional hedge calls for the purchase/sale of one pound of futures for each pound of cash feeder cattle. By contrast, a ratio hedge requires estimation of a hedge ratio to determine the number of pounds of futures needed to hedge one pound of cash feeder cattle. Hedge ratios were found to be larger than 1.0 for light-weight feeder cattle. By using the estimated hedge ratios, it was shown that hedging risk could be reduced 20-50 percent compared to that achieved by using a hedge ratio of 1.0.

Keywords: Livestock; Production/Industries (search for similar items in EconPapers)
Date: 1990
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:ags:sojoae:30012

DOI: 10.22004/ag.econ.30012

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