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Article
Relaxing the Assumptions of Minimum-Variance Hedging
Journal of Agricultural and Resource Economics
  • Sergio H Lence, Iowa State University
Document Type
Article
Publication Version
Published Version
Publication Date
1-1-1996
Abstract
The 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.
Comments

This article is from Journal of Agricultural and Resource Economics 21 (1996): 39. Posted with permission.

Copyright Owner
Western Agricultural Economics Association
Language
en
File Format
application/pdf
Citation Information
Sergio 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/