Comparison of Some Static Hedging Models of Agricultural Commodities Price Uncertainty
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Comparison of Some Static Hedging Models of Agricultural Commodities Price Uncertainty Jules Sadefo Kamdem1 · Zoulkiflou Moumouni2
© The Indian Econometric Society 2020
Abstract In static framework, many hedging strategies can be settled following the various hedge ratios that have been developed in the literature. However, it is difficult to choose among them the best the appropriate strategy according the to preference or economic behavior of the decision-maker such as prudence and temperance. This is so even with the hedging effectiveness measure. After introducing a hedging ratio that take into account the prudence and temperance of the decision maker, we propose a ranking based approach to measure the effectiveness using L-moment to classify hedge portfolios, hence hedge ratios, with regard to their performance. Moreover, we deal with the hedging issue in presence of quantity and rollover risks and derive an optimal strategy that depends upon the basis and insurance contract. Such hedging issue includes the relevant risks encountered in practice and we relate how insurance contract, specially designed for production risk could affect the futures hedge. The application on some agricultural futures prices data at hands shows that taking into account quantity and rollover risks leads to better hedging strategy based on the L-performance effectiveness measure. Keywords Agriculture · Risk management · Futures markets · Commodities · Risk aversion JEL Classification C02 · G22 · M11 · Q14
J. Sadefo Kamdem: Thanks for the financial support of the OYAMAR FEDER Project from CNRS USR 3456 (LEEISA). * Jules Sadefo Kamdem [email protected]; jules.sadefo‑[email protected] 1
MRE EA 7491 (Universite de Montpellier), UFR d’Economie, Avenue Raymond Dugrand, Site de Richter, C.S. 79606, 34960 Montpellier Cedex 2, France
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MRE EA 7491 (Universite de Montpellier), Montpellier Cedex 2, France
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Vol.:(0123456789)
Journal of Quantitative Economics
Introduction Commodity prices rely on the production of their underlying as well as on the factors related to their economy rationales such as calendar seasons or crop years, consumption and policies, supply and demand balance, inventories, etc. Commodity prices mainly incur risks in both market and production. Indeed, the major part of producer’s revenue consists of their crop and any adverse price move will affect their incomes. On one hand, the globalization of commodity markets provides financial derivatives like futures, forwards or options to hedge against these risks by shifting them to investors that are looking speculation opportunities. On the other hand, commodities can be also stored to avoid disruptions coming from shortage that generates cost of carry due to quality deterioration along with storage period. In agricultural markets, a way to avoid these carry costs is to enter in financial markets with derivatives which values are determined, in some way by the prices of physical goods. Thus, the holding of commodities in inventories for facing eventual
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