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Title:A Portfolio Theory-Based Optimal Hedging Technique With an Application to A Commercial Cattle Feedlot
Author(s):Peterson, Paul Edward
Department / Program:Agricultural Economics
Discipline:Agricultural Economics
Degree Granting Institution:University of Illinois at Urbana-Champaign
Subject(s):Economics, Agricultural
Abstract:This dissertation treats the optimal hedging problem as a special case of the general portfolio problem. The hedger, who holds some cash position, wants to find the futures position which reduces the risk of the entire portfolio to some level consistent with his risk-return preferences.
This technique was applied to a cattle feedlot which bought feeder cattle and two lots of corn, and sold live cattle. The feeding period was divided into three stages, each lasting three months. At the beginning of the first stage, anticipatory optimal hedges were placed on all four cash commodities, and then at the end of each stage as cash commodities were bought or sold, all hedges were lifted and new optimal hedges were placed on the remaining cash commodities. This process was repeated for a total of 76 overlapping 9-month feeding periods covering the time period from March 1975 to March 1982.
Nine different hedging models were used, six of which solved for optimal hedges. These included a discrete version that hedged only price risk on cash and futures positions, another discrete version that hedged both price risk and basis risk, and a continuous version that hedged both price risk and basis risk, with each version run at two levels of risk aversion. Feeding margins were calculated for each model for each pen as proxies for cattle feeding income, and means and variances of the feeding margins were used as measures of return and risk, respectively.
Optimal hedges usually covered less than 100% of the cash position, and basis risk was found to be an important factor in determining the optimal hedge. The level of risk aversion made a considerable difference in the optimal hedging solutions, with higher levels of hedging at higher levels of risk aversion. However, there was little difference between discrete and rounded-off continuous solutions. Finally, optimal hedging reduced income volatility for cattle feeders, while maintaining a level of income comparable with that received from either fully hedged or unhedged positions.
Issue Date:1983
Description:219 p.
Thesis (Ph.D.)--University of Illinois at Urbana-Champaign, 1983.
Other Identifier(s):(UMI)AAI8309999
Date Available in IDEALS:2014-12-15
Date Deposited:1983

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