IDEAS home Printed from https://ideas.repec.org/a/ags/joaaec/15152.html
   My bibliography  Save this article

Hedging With Futures And Options Under A Truncated Cash Price Distribution

Author

Listed:
  • Hanson, Steven D.
  • Myers, Robert J.
  • Hilker, James H.

Abstract

Many agricultural producers face cash price distributions that are effectively truncated at a lower limit through participation in farm programs designed to support farm prices and incomes. For example, the 1996 Federal Agricultural Improvement Act (FAIR) makes many producers eligible to obtain marketing loans which truncate their cash price realization at the loan rate, while allowing market prices to freely equilibrate supply and demand. This paper studies the effects of truncated cash price distributions on the optimal use of futures and options. The results show that truncation in the cash price distribution facing an individual producer provides incentives to trade options as well as futures. We derive optimal futures and options trading rules under options as well as futures. We derive optimal futures and options trading rules under a range of different truncation scenarios. Empirical results highlights the impacts of basis risk and yield risk on the optimal futures and options portfolio.

Suggested Citation

  • Hanson, Steven D. & Myers, Robert J. & Hilker, James H., 1999. "Hedging With Futures And Options Under A Truncated Cash Price Distribution," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 31(3), pages 1-11, December.
    • Handle: RePEc:ags:joaaec:15152
    DOI: 10.22004/ag.econ.15152
    as

    Download full text from publisher

    File URL: https://ageconsearch.umn.edu/record/15152/files/31030449.pdf
    Download Restriction: no
    File URL: https://libkey.io/10.22004/ag.econ.15152?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Danthine, Jean-Pierre, 1978. "Information, futures prices, and stabilizing speculation," Journal of Economic Theory, Elsevier, vol. 17(1), pages 79-98, February.
    2. Gershon Feder & Richard E. Just & Andrew Schmitz, 1980. "Futures Markets and the Theory of the Firm under Price Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 94(2), pages 317-328.
    3. Harvey Lapan & Giancarlo Moschini & Steven D. Hanson, 1991. "Production, Hedging, and Speculative Decisions with Options and Futures Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 73(1), pages 66-74.
    4. Chavas, Jean-Paul & Pope, Rulon D., 1982. "Hedging And Production Decisions Under A Linear Mean-Variance Preference Function," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 7(1), pages 1-12, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Wang, Dabin & Tomek, William G., 2005. "Characterizing Distributions of Class III Milk Prices: Implications for Risk Management," Working Papers 127085, Cornell University, Department of Applied Economics and Management.
    2. Forde, Martin & Kumar, Rohini & Zhang, Hongzhong, 2015. "Large deviations for the boundary local time of doubly reflected Brownian motion," Statistics & Probability Letters, Elsevier, vol. 96(C), pages 262-268.
    3. Qingpei Zang & Lixin Zhang, 2019. "Asymptotic Behaviour of the Trajectory Fitting Estimator for Reflected Ornstein–Uhlenbeck Processes," Journal of Theoretical Probability, Springer, vol. 32(1), pages 183-201, March.
    4. Wang, Dabin & Tomek, William G., 2005. "Characterizing Distributions of Class III Milk Prices: Implications for Risk Management," 2005 Annual meeting, July 24-27, Providence, RI 19322, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    5. Finger, Robert, 2012. "How strong is the “natural hedge”? The effects of crop acreage and aggregation levels," 123rd Seminar, February 23-24, 2012, Dublin, Ireland 122538, European Association of Agricultural Economists.
    6. Zhang, Rui (Carolyn) & Houston, Jack E. & Vedenov, Dmitry V. & Barnett, Barry J., 2008. "Impacts of government risk management policies on hedging in futures and options:LPM2 hedge model vs. EU hedge model," 2008 Conference, April 21-22, 2008, St. Louis, Missouri 37610, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    7. Xing, Liu & Pietola, Kyosti, 2005. "Forward Hedging Under Price and Production Risk of Wheat," 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark 24467, European Association of Agricultural Economists.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lence, Sergio Horacio, 1991. "Dynamic firm behavior under uncertainty," ISU General Staff Papers 1991010108000010656, Iowa State University, Department of Economics.
    2. Harvey Lapan & Giancarlo Moschini & Steven D. Hanson, 1991. "Production, Hedging, and Speculative Decisions with Options and Futures Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 73(1), pages 66-74.
    3. Sergio H. Lence & Dermot J. Hayes, 1995. "Optimal Hedging Under Forward‐Looking Behaviour," The Economic Record, The Economic Society of Australia, vol. 71(4), pages 329-342, December.
    4. Ricome, Aymeric & Chaib, Karim & Ridier, Aude & Kephaliacos, Charilaos & Carpy-Goulard, Francoise, 2012. "The role of cash crop marketing contracts in the adoption of low-input practices in the presence of risk and income supports," 126th Seminar, June 27-29, 2012, Capri, Italy 126222, European Association of Agricultural Economists.
    5. Falatoonzadeh, Hamid & Conner, J. Richard & Pope, Rulon D., 1985. "Risk Management Strategies To Reduce Net Income Variability For Farmers," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, vol. 17(1), pages 1-14, July.
    6. Robison, Lindon J. & Hanson, Steven D., 1995. "Analyzing Firm Response to Risk Using Mean-Variance Models," Staff Paper Series 201207, Michigan State University, Department of Agricultural, Food, and Resource Economics.
    7. Wong, Kit Pong, 2012. "Production and futures hedging with state-dependent background risk," International Review of Economics & Finance, Elsevier, vol. 24(C), pages 177-184.
    8. Meng, Rujing & Wong, Kit Pong, 2010. "Multinationals and futures hedging: An optimal stopping approach," Global Finance Journal, Elsevier, vol. 21(1), pages 13-25.
    9. Park, Timothy A. & Antonovitz, Frances, 1991. "Econometric Tests Of Firm Decision Making Under Uncertainty: Optimal Output And Hedging Decisions," 1991 Annual Meeting, August 4-7, Manhattan, Kansas 271264, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    10. Larry S. Karp, 1987. "Methods for Selecting the Optimal Dynamic Hedge When Production is Stochastic," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 69(3), pages 647-657.
    11. Blank, Steven C., 1989. "Hedging Objectives, Hedging Markets, And The Relevant Range Of Hedge Ratios," Working Papers 225826, University of California, Davis, Department of Agricultural and Resource Economics.
    12. Kim, Jae-Gyeong, 1993. "Futures markets in an open economy," ISU General Staff Papers 1993010108000011461, Iowa State University, Department of Economics.
    13. David J. Pannell & Getu Hailu & Alfons Weersink & Amanda Burt, 2008. "More reasons why farmers have so little interest in futures markets," Agricultural Economics, International Association of Agricultural Economists, vol. 39(1), pages 41-50, July.
    14. Tantisantiwong, Nongnuch, 2013. "Price Transmission and Effects of Exchange Rates on Domestic Commodity Prices via Offshore and Currency Hedging," SIRE Discussion Papers 2013-116, Scottish Institute for Research in Economics (SIRE).
    15. Ahmet Enis Kocagil, 1997. "Does futures speculation stabilize spot prices? Evidence from metals markets," Applied Financial Economics, Taylor & Francis Journals, vol. 7(1), pages 115-125.
    16. Kit Pong Wong, 2022. "Production and hedging under correlated price and background risks," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 45(1), pages 241-256, June.
    17. Huffman, Wallace E & Just, Richard E, 2004. "Implications of Agency Theory for Optimal Land Tenure Contracts," Economic Development and Cultural Change, University of Chicago Press, vol. 52(3), pages 617-642, April.
    18. Rausser, Gordon C & Carter, Colin, 1983. "Futures Market Efficiency in the Soybean Complex," The Review of Economics and Statistics, MIT Press, vol. 65(3), pages 469-478, August.
    19. Benninga, Simon Z. & Oosterhof, Casper M., 2004. "Hedging with forwards and puts in complete and incomplete markets," Journal of Banking & Finance, Elsevier, vol. 28(1), pages 1-17, January.
    20. Sergio H. Lence & Dermot J. Hayes & Yong Sakong, 1994. "Multiperiod Production with Forward and Option Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 76(2), pages 286-295.

    More about this item

    Keywords

    Marketing;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ags:joaaec:15152. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: AgEcon Search (email available below). General contact details of provider: https://edirc.repec.org/data/saeaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.