Hedging Risk For Feeder Cattle With A Traditional Hedge Compared To A Ratio Hedge

Emmett Elam and James Davis

Journal of Agricultural and Applied Economics, 1990, vol. 22, issue 2, 209-216

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.

Date: 1990
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