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Hedging Multiple Price Uncertainty in International Grain Trade

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  • Michael S. Haigh
  • Matthew T. Holt

Abstract

Commodity and freight futures contracts are analyzed for their effectiveness in reducing uncertainty for international traders. A theoretical model is developed for a trader exposed to several types of risk. OLS hedge ratio estimation is compared to the SUR and the multivariate GARCH methodologies. Explicit modeling of the time-variation in hedge ratios via the multivariate GARCH methodology, using all derivatives, and taking into account dependencies between prices, results in reductions in risk, even after accounting for transaction costs. Results confirm that while the commodity futures contracts are important for hedging risk, freight futures are a useful mechanism for reducing risk. Copyright 2000, Oxford University Press.

Suggested Citation

  • Michael S. Haigh & Matthew T. Holt, 2000. "Hedging Multiple Price Uncertainty in International Grain Trade," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(4), pages 881-896.
    • Handle: RePEc:oup:ajagec:v:82:y:2000:i:4:p:881-896
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    File URL: http://hdl.handle.net/10.1111/0002-9092.00088
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