Evaluating the Hedging Potential of the Lean Hog Futures Contract

Mark W. Ditsch and Raymond M. Leuthold
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Mark W. Ditsch: Consolidated Grain & Barge Company
Raymond M. Leuthold: University of Illinois at Urbana-Champaign

Finance from University Library of Munich, Germany

Abstract: The lean hog futures contract is replacing the live hog futures contract at the Chicago Mercantile Exchange beginning with the February 1997 contract. The lean hog futures will be cash settled based on a broad-based lean hog price index, eliminating terminal markets from the price discovery process. Using this index over a twenty-month period as a proxy for the lean hog futures price, this paper compares the hedging effectiveness of the live hog futures contract to the hedging potential of the lean hog futures contract for cash live hogs as well as four cash meat cuts. Frozen pork bellies futures are also examined for the cash meats. Both long-term and short-term hedges are simulated, using the minimum-variance approach, which utilizes only unconditional information, and the Myers-Thompson approach that incorporates conditional information. The results show that the lean hog futures should perform better than either the live hog or the frozen pork bellies futures as a hedging instrument for Omaha cash hogs and cash loins. The strongest evidence of this is for the short-term hedging of cash hogs. For the other three meats, no futures contract demonstrated a clear hedging advantage.

Keywords: lean hog futures contract; hedging (search for similar items in EconPapers)
JEL-codes: Q Q13 Q14 (search for similar items in EconPapers)
Pages: 23 pages
Date: 1996-09-23
Note: Type of Document - Word Perfect 6.1; prepared on PC; to print on HP Laser Jet 4; pages: 23. Office for Futures and Options Research (OFOR) at the University of Illinois, Urbana-Champaign. Working Paper 96-03. For a complete list of OFOR working papers see
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Citations: View citations in EconPapers (8)

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