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Hedging with Crop Yield Futures: A Mean‐Variance Analysis
Author(s) -
Vukina Tomislav,
Li Dongfeng,
Holthausen Duncan M.
Publication year - 1996
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.2307/1243857
Subject(s) - futures contract , yield (engineering) , economics , hedge , variance (accounting) , basis risk , convenience yield , profit (economics) , price risk , econometrics , position (finance) , financial economics , microeconomics , spot contract , finance , capital asset pricing model , ecology , materials science , accounting , biology , metallurgy
This investigation into the use of new Chicago Board of Trade yield futures to manage price and yield risks shows that a risk‐minimizing firm can reduce its variance of profit by hedging in both markets compared to hedging in price futures only. The greater the variance of the contract underlying yield, the less effective the two‐instrument hedge. Hedging effectiveness of the dual strategy also depends on the price and yield bases, and the effect of a change in either basis depends on whether the established crop yield futures position is short or long.