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Abstract

Options on futures give hedgers a way to construct a risk management portfolio which has similar properties to the risk they face in the cash market. Of particular importance is the benefit that options provide when the cash position value is non-linearly related to the futures price. Such a situation is particularly prevalent for grain producers who face random cash prices and output. This study presents two methods for constructing an options portfolio composed of different strike prices. An empirical application for regional corn production in the U.S. demonstrates that both methods are similar in terms of risk reduction and, in some instances, provided significant improvements from using futures.

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