Duncan M. Holthausen

Hedging with Crop Yield Futures: A Mean-Variance Analysis

This investigation into the use of new Chicago Board of Trade yield futures to manage price and yield risks shows that a risk-minimizing firm can reduce its variance of profit by hedging in both markets compared to hedging in price futures only. The greater the variance of the contract underlying yield, the less effective the two-instrument hedge. Hedging effectiveness of the dual strategy also depends on the price and yield bases, and the effect of a change in either basis depends on whether the established crop yield futures position is short or long. Copyright 1996, Oxford University Press.

A Simple Multiperiod Minimum Risk Hedge Model

A multiperiod hedging model is developed that is simpler than other multiperiod models in the literature. The model permits periodic adjustment of the hedge while minimizing the producers profit variance. Minimum risk hedge ratios are calculated for steers, cows, hogs, com, and soybeans using the full model with hedge adjustments every two months. These ratios are compared to those using the model without periodic hedge adjustments and to a simple single-period model. The results suggest that simple models may work well for simple hedges, while the full model is best for more complex hedging situations such as cross hedges.

A model of incentive regulation

Abstract A method of incentive regulation is presented. The regulatory agency sets a‘fair rate of return’ which is used to determine a ‘target’ profit for the regulated firm. If the firms actual profit differs from the target profit, it retains a fraction of the excess (or absorbs a fraction of the deficit). This feature of the system provides a strong incentive for efficient operation. Properties of the incentive system are explored and problems of implementation are briefly examined.