Hedging performance of shrimp futures contracts with multiple deliverable grades

Josué Martínez‐Garmendia and James Anderson

Journal of Futures Markets, 1999, vol. 19, issue 8, 957-990

Abstract: The performance of the black tiger and white shrimp futures contracts traded in the Minneapolis Grain Exchange (MGE) is considered. These two futures contracts have suffered low trader participation[fn100] since their inception despite the underlying multibillion‐dollar cash shrimp market. The article tries to find answers for such lack of interest in the context of the multiple deliverable category character of both contracts. In particular, the hedging effectiveness and the adequacy of the premiums/discounts are measured for the various shrimp size categories traded in each contract. The analyses indicate that the hedging effectiveness of both contracts is relatively modest. Part of the explanation for the performance of the contracts resides in high deliverable category exchange option values, which stem from volatility in the price differentials between size categories. The fixed premiums/discounts are not able to provide a remedy to the alternation in the cheapest to deliver category. There is also a liquidity problem that could result from the peculiarities of seafood trade. It is concluded that the lack of trader interest may be influenced by initial high deliverable category exchange option values. © 1999 John Wiley & Sons, Inc. Jrl Fut Mark 19: 957–990, 1999

Date: 1999
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