Hedging with Futures and Options under a Truncated Cash Price Distribution
- 1 December 1999
- journal article
- research article
- Published by Cambridge University Press (CUP) in Journal of Agricultural and Applied Economics
- Vol. 31 (3), 449-459
- https://doi.org/10.1017/s1074070800008762
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
This publication has 9 references indexed in Scilit:
- Hedging with Commodity Options When Price Distributions are SkewedAmerican Journal of Agricultural Economics, 1995
- Hedging Production Risk With OptionsAmerican Journal of Agricultural Economics, 1993
- Pricing Commodity Options when the Underlying Futures Price Exhibits Time‐Varying VolatilityAmerican Journal of Agricultural Economics, 1993
- Hedging Price Risk with Options and Futures for the Competitive Firm with Production FlexibilityInternational Economic Review, 1992
- Production, Hedging, and Speculative Decisions with Options and Futures MarketsAmerican Journal of Agricultural Economics, 1991
- Forward and Futures Markets and the Competitive Firm under Price UncertaintySouthern Economic Journal, 1988
- Futures Markets and the Theory of the Firm Under Price UncertaintyThe Quarterly Journal of Economics, 1980
- Optimal Hedging under Price and Quantity Uncertainty: The Case of a Cocoa ProducerJournal of Political Economy, 1980
- Information, futures prices, and stabilizing speculationJournal of Economic Theory, 1978