Relaxing the Assumptions of Minimum-Variance HedgingJournal of Agricultural and Resource Economics
Publication VersionPublished Version
AbstractThe most important minimum-variance hedge-ratio assumptions are (a) that production is deterministic and (b) that all of the agent's wealth is invested in the cash position. Stochastic production greatly reduces optimal hedge ratios. An alternative investment greatly reduces opportunity costs of not hedging by "diluting" the cash position. Stochastic production and/or alternative investments render the costs associated with hedging relatively more important, yielding almost negligible net benefits of hedging. Hence, hedging costs typically dismissed in hedging models for being seemingly negligible are important determinants of hedging behavior.
Copyright OwnerWestern Agricultural Economics Association
Citation InformationSergio H Lence. "Relaxing the Assumptions of Minimum-Variance Hedging" Journal of Agricultural and Resource Economics Vol. 21 Iss. 1 (1996) p. 39 - 55
Available at: http://works.bepress.com/sergio_lence/22/