Hedging risk for feeder cattle with a traditional hedge compared to a ratio hedge
1990
Elam, E. | Davis, J.
This paper compares hedging risk for various weights of feeder cattle hedged with a traditional cross hedge and a ratio cross hedge. A traditional hedge calls for the purchase/sale of one pound of futures for each pound of cash feeder cattle. By contrast a ratio hedge requires estimation of a hedge ratio to determine the number of pounds of futures needed to hedge one pound of cash feeder cattle. Hedge ratios were found to be larger than 1.0 for light-weight feeder cattle. By using the estimated hedge ratios, it was shown that hedging risk could be reduced 20-50 percent compared to that achieved by using a hedge ratio of 1.0.
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