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Risk Aversion and Optimal Hedge Ratio in Commodities Futures Markets

Author

Listed:
  • Willy Kamdem

    (Université de Douala)

  • David Kamdem

    (Université de Dschang)

  • Jules Sadefo-Kamdem

    (MRE - Montpellier Recherche en Economie - UM - Université de Montpellier)

  • Louis Aimé Fono

    (Université de Douala)

Abstract

In this paper, our main objective is to show that the determination of the optimal hedge ratio for a raw material producer, who is submitted to income risk, depends on the type of its utility function. More precisely, we maximize the expected utility of wealth for the following four utility functions : quadratic, exponential, power and expo-power. We then derive an explicit formula of the optimal hedge ratio when using the first two functions and an implicit function when the agent's preferences are modeled by power or expo-power utility functions. The results obtained are then applied to data on quantity and prices collected from the NCCB and ICCO from 1980 to 2013. The implementation with some Matlab programs provides the estimated value of the optimal hedge ratio for a Cameroonian cocoa producer around 80% for quadratic and exponential utility functions, and 87.9% for power utility and between 50% and 65% for the expo-power utility function.

Suggested Citation

  • Willy Kamdem & David Kamdem & Jules Sadefo-Kamdem & Louis Aimé Fono, 2020. "Risk Aversion and Optimal Hedge Ratio in Commodities Futures Markets," Post-Print hal-02922890, HAL.
    • Handle: RePEc:hal:journl:hal-02922890
    Note: View the original document on HAL open archive server: https://hal.science/hal-02922890
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    Cited by:

    1. William T. Smith, 2022. "The optimal hedge ratio: A solution, a conjecture, and a challenge," Economics Bulletin, AccessEcon, vol. 42(2), pages 877-888.
    2. Ismael Pérez-Franco & Esteban Otto Thomasz & Gonzalo Rondinone & Agustín García-García, 2022. "Feed price risk management for sheep production in Spain: a composite future cross-hedging strategy," Risk Management, Palgrave Macmillan, vol. 24(2), pages 137-163, June.
    3. William T. Smith, 2023. "The optimal hedge ratio: A closed-form solution, a conjecture, and a challenge," Economics Bulletin, AccessEcon, vol. 43(2), pages 748-758.

    More about this item

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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