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Hedging with Options under Variance Uncertainty: An Illustration of Pricing New-Crop Soybeans

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  • Robert J. Hauser
  • Dane K. Andersen

Abstract

The behavior of a commodity's price-return variance over time is critical to both the theory and practice of commodity option valuation. In this paper three models are used to forecast soybean price variance for the period during which a seasonal increase in variance has been found in previous studies. A time-series model outperforms the ordinary least squares and naive models. The significance of the forecast error levels is then examined in terms of expected deviations above and below a price target for a put hedge. The resulting trade-off between risk and return is shown by strike price and variance expectation.

Suggested Citation

  • Robert J. Hauser & Dane K. Andersen, 1987. "Hedging with Options under Variance Uncertainty: An Illustration of Pricing New-Crop Soybeans," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 69(1), pages 38-45.
    • Handle: RePEc:oup:ajagec:v:69:y:1987:i:1:p:38-45.
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    Citations

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    Cited by:

    1. Sherrick, Bruce J. & Irwin, Scott H. & Forster, D. Lynn, 1990. "Nonstationarity Of Soybean Futures Price Distributions: Option-Based Evidence," Illinois Agricultural Economics Staff Paper 244666, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
    2. Wojciechowski, Jan & Ames, Glenn C.W. & Turner, Steven C. & Miller, Bill R., 2000. "Marketing Of Cotton Fiber In The Presence Of Yield And Price Risk," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 32(3), pages 1-9, December.
    3. Blank, Steven C., 1989. "Research On Futures Markets: Issues, Approaches, And Empirical Findings," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 14(1), pages 1-14, July.
    4. Tabesh, Hamid, 1987. "Hedging price risk to soybean producers with futures and options: a case study," ISU General Staff Papers 1987010108000010306, Iowa State University, Department of Economics.
    5. Duncan, Steven Scott, 1988. "The relevant forecast of variance of income for marketing decisions under uncertainty," ISU General Staff Papers 198801010800009839, Iowa State University, Department of Economics.
    6. Sophie Mitra & Jean‐Marc Boussard, 2012. "A simple model of endogenous agricultural commodity price fluctuations with storage," Agricultural Economics, International Association of Agricultural Economists, vol. 43(1), pages 1-15, January.
    7. Bullock, David William, 1989. "Options and market information: a mean-variance portfolio approach," ISU General Staff Papers 1989010108000010107, Iowa State University, Department of Economics.

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