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Hedging Risk For Feeder Cattle With A Traditional Hedge Compared To A Ratio Hedge

Published online by Cambridge University Press:  09 September 2016

Emmett Elam  and
James Davis
Emmett Elam
Affiliation:
Department of Agricultural Economics atTexas Tech University, Lubbock, Texas
James Davis
Affiliation:
Department of Agricultural Economics atTexas Tech University, Lubbock, Texas
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Abstract

This paper compares hedging risk for various weights of feeder cattle hedged with a traditional cross hedge and a ratio cross hedge. A traditional hedge calls for the purchase/sale of one pound of futures for each pound of cash feeder cattle. By contrast, a ratio hedge requires estimation of a hedge ratio to determine the number of pounds of futures needed to hedge one pound of cash feeder cattle. Hedge ratios were found to be larger than 1.0 for light-weight feeder cattle. By using the estimated hedge ratios, it was shown that hedging risk could be reduced 20-50 percent compared to that achieved by using a hedge ratio of 1.0.

Keywords

feeder cattletraditional cross hedgeratio cross hedgehedge ratiohedging riskbasis
Type
Articles
Information
Journal of Agricultural and Applied Economics , Volume 22 , Issue 2 , December 1990 , pp. 209 - 216
Copyright
Copyright © Southern Agricultural Economics Association 1990

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