The Demand for Hedging with Futures and Options

Darren L. Frechette

Journal of Futures Markets, 2001, vol. 21, issue 8, 693-712

Abstract: The optimal hedging portfolio is shown to include both futures and options under a variety of circumstances when the marginal cost of hedging is nonzero. Futures and options are treated as substitute goods, and the properties of the resulting hedging demand system are explained. The overall optimal hedge ratio is shown to increase when the marginal cost of trading options is reduced. The overall optimal hedge ratio is shown to decrease when the marginal cost of trading futures is decreased. One implication is that hedging demand can be stimulated by a reduction in the perceived cost of trading options through the education of hedgers about options and the initiation of programs such as the Dairy Options Pilot Program. The demand approach is applied to estimate optimal hedge ratios for dairy producers hedging corn inputs in five regions of Pennsylvania. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:693–712, 2001

Date: 2001
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/

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:wly:jfutmk:v:21:y:2001:i:8:p:693-712

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0270-7314

Access Statistics for this article

Journal of Futures Markets is currently edited by Robert I. Webb

More articles in Journal of Futures Markets from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().