Hostname: page-component-cd9895bd7-8ctnn Total loading time: 0 Render date: 2024-12-26T18:43:08.422Z Has data issue: false hasContentIssue false
  • English
  • Français

Hedging with Futures and Options under a Truncated Cash Price Distribution

Published online by Cambridge University Press:  28 April 2015

Steven D. Hanson ,
Robert J. Myers  and
James H. Hilker
Steven D. Hanson
Affiliation:
Department of Agricultural Economics, Michigan State University, East Lansing, Michigan
Robert J. Myers
Affiliation:
Department of Agricultural Economics, Michigan State University, East Lansing, Michigan
James H. Hilker
Affiliation:
Department of Agricultural Economics, Michigan State University, East Lansing, Michigan
Get access Rights & Permissions [Opens in a new window]

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 a range of different truncation scenarios. Empirical results highlight the impacts of basis risk and yield risk on the optimal futures and options portfolio.

Keywords

farm programsfutureshedgingoptionstruncation
Type
Articles
Information
Journal of Agricultural and Applied Economics , Volume 31 , Issue 3 , December 1999 , pp. 449 - 459
Copyright
Copyright © Southern Agricultural Economics Association 1999

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Antonovitz, F. and Nelson, R.D.. “Forward and Futures Markets and the Competitive Firm Under Price Uncertainty,” Southern Economics Journal 55(1988): 182–195.CrossRefGoogle Scholar
Chavas, J.-P. and R. Pope, . “Hedging and Production Decisions Under a Linear Mean-Variance Preference Function.” Western Journal of Agricultural Economics 7(1982):99–110.Google Scholar
Cochrane, Willard W.The Development of American Agriculture: A Historical Analysis. University of Minnesota Press, Minneapolis, 1979.Google Scholar
Danthine, J.P. “Information, Futures Prices, and Stabilizing Speculation.” Journal of Economics Theory 17(1978):79–98.CrossRefGoogle Scholar
Feder, G., Just, R.E., and A. Schmitz, . “Futures Markets and the Theory of the Firm Under Price Uncertainty.” Quarterly Journal of Economics 94(1980):317–328.CrossRefGoogle Scholar
Jarrow, R.A., and A. Rudd, . Option Pricing, Richard D. Irwin, Inc., 1983.Google Scholar
Lapan, H., Moschini, G., and S. Hanson, . “Production, Hedging, and Speculative Decisions with Options and Futures Markets,” American Journal of Agricultural Economics 73(February 1991):66–74.CrossRefGoogle Scholar
Moschini, G. and H. Lapan, . “Hedging Price Risk with Options and Futures for the Competitive Firm with Production Flexibility,” International Economcis Review 33 (August 1992):607–618.CrossRefGoogle Scholar
Myers, R.J. and Hanson, S.D.. “Pricing Commodity Options When the Underlying Futures Price Exhibits Time-Varying Volatility.” American Journal of Agricultural Economics 75(1993): 121–130.CrossRefGoogle Scholar
Rolfo, J. “Optimal Hedging Under Price and Quantity Uncertainty: The Case of a Cocoa Producer.” Journal of Political Economics 88(1980): 100–116.CrossRefGoogle Scholar
Sakong, Y., Hayes, D., and A. Hallam, . “Hedging Production Risk with Options,” American Journal of Agricultural Economics 75 (May 1993): 408–415.CrossRefGoogle Scholar
USDA. “Commodity Fact Sheet: Feed Grains.” Farm Service Agency, May 1997.Google Scholar
Vercammon, J. “Hedging with Commodity Options When Price Distributions are Skewed,” American Journal of Agricultual Economics 77 (November 1995):935–945.CrossRefGoogle Scholar