The paper investigates the optimal hedging strategies of Quebec hog producers when they participate in a publicly-funded revenue insurance program (known under the French acronym ASRA). A forecast model of local cash and futures prices is built and Monte Carlo methods are used to derive the optimal futures and option positions of Quebec hog producers. The positive correlation between forecast errors of futures and cash spot prices induces positive sales of futures and put options to hedge price risk. ASRA provides put options to hog producers at actuarially advantageous terms. Producers can increase the expected utility of profits by selling back a portion of these put options using financial markets. Options are attractive to manage price risk given the non-linearity in the profit function induced by the revenue insurance scheme. Speculative incentives to use futures and options are also discussed in the context of ASRA.
- Revenue insurance,
- Hog production.
Available at: http://works.bepress.com/jp_gervais/8/