Hedging in Futures and Options Markets with Basis Risk

2002 ◽  
Vol 22 (1) ◽  
pp. 59 ◽  
Author(s):  
Olivier Mahul
Keyword(s):  
Options Markets ◽  
Basis Risk ◽  
Futures And Options

scholarly journals Hedging with Futures and Options under a Truncated Cash Price Distribution

1999 ◽  
Vol 31 (3) ◽  
pp. 449-459 ◽  
Author(s):  
Steven D. Hanson ◽  
Robert J. Myers ◽  
James H. Hilker
Keyword(s):  
Supply And Demand ◽  
Agricultural Producers ◽  
Market Prices ◽  
Basis Risk ◽  
Agricultural Improvement ◽  
Loan Rate ◽  
Price Distribution ◽  
Farm Programs ◽  
Yield Risk ◽  
Futures And Options

AbstractMany 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.

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