The effectiveness of the London grain futures markets: Some empirical results

G. L. Rees and D. W. Colenutt

European Review of Agricultural Economics, 1977, vol. 4, issue 1, 49-73

Abstract: Summary Hypothetical exercises were carried out for each of (i) conventional hedging, (ii) operational hedging, and (iii) carrying-charge hedging, for two periods, viz, I, harvest 1969 to June 1972, and, II, June 1972 to December 1974. For three-month type (i) hedges in both barley and wheat, losses and gains were on the whole diminished in accordance with theory. Hypothetical hedges of six-month duration reduced price risk during period II. For operational hedging, durations of two and four weeks were chosen. The results were markedly inferior to type (i) hedging, especially for the shorter time period. Carrying-charge hedges were selected in suitable cases, from the data assembled for the type (i) exercise. Results for this third category of hedging, which depends for its effectiveness upon changes in spot and futures prices, were generally satisfactory for hypothetical trades. Finally, the data show that for both wheat and barley, there was a significant decrease in price instability following the opening of the futures markets. However, due to other major changes, it is not possible to claim that this was the result of futures trading.

Date: 1977
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