HEDGING WITH FUTURES AND OPTIONS: A DEMAND SYSTEMS APPROACH

The optimal hedging portfolio is shown to include both futures and options under a variety of circumstances when the marginal cost of hedging is non-zero. Futures and options are treated as substitute goods, and properties of the resulting hedging demand system are explained. The overall optimal hedge ratio is shown to increase when the marginal cost of trading options is reduced. The overall optimal hedge ratio is shown to decrease when the marginal cost of trading futures is decreased. The implication is that hedging demand can be stimulated by reducing the perceived cost of trading options, by educating hedgers about options and by initiating programs like the Dairy Options Pilot Program. The demand systems approach is applied to estimate optimal hedge ratios for dairy producers hedging corn inputs in five regions of Pennsylvania.


Keywords:
Subject(s):
Issue Date:
2000
Publication Type:
Conference Paper/ Presentation
PURL Identifier:
http://purl.umn.edu/18941
Total Pages:
23
Series Statement:
2000 Conference, Chicago, IL, April 17-18 2000




 Record created 2017-04-01, last modified 2017-08-24

Fulltext:
Download fulltext
PDF

Rate this document:

Rate this document:
1
2
3
 
(Not yet reviewed)