PRICE RISK MANAGEMENT STRATEGIES FOR GRAIN IMPORTERS

The presence of multiple sources of uncertainty complicates hedging decisions. One of these is the output price and its correlation with input prices. The other is how far forward a firm covers its positions. This study analyzes hedging strategies for grain importers as processors. The analytical model addresses questions of the hedge horizon and accounts for the correlation between input and output prices and exchange rate risk. A theoretical model was developed explicitly modeling the operations of a grain importing firm. The concept of strategic demand for hedging was developed in the context of an analytical model, representing the adjustment in hedge ratios in relation to the hedge horizon and input-output price correlations. Results indicated that the hedging demand diminishes as the time horizon increases, that input-output price correlations have an important impact on hedging, as does the exchange rate. The model also illustrated the impact of price controls and/or output contracting on risk exposure and the demand for hedging.


Issue Date:
2002
Publication Type:
Working or Discussion Paper
Record Identifier:
http://ageconsearch.umn.edu/record/23665
PURL Identifier:
http://purl.umn.edu/23665
Total Pages:
19
Series Statement:
Staff Paper No. AAE 02004




 Record created 2017-04-01, last modified 2018-01-22

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