Hedging with options on commodity futures contracts: a safety-first versus expected utility approach
| Autor: | Gaspar, Victor J. |
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| Jazyk: | angličtina |
| Rok vydání: | 1994 |
| Druh dokumentu: | Text |
| Popis: | This study evaluates how a decision-maker (such as a farmer) facing output price risk might use futures contracts and or option contracts on those futures to hedge against any potential financial risk attributed to volatile output prices. Two behavioral models are assumed in this study. One where the decision-maker behaves as an expected utility maximizer and one where the decisions made are based upon safety-first rules. The expected utility model in this study is based on the general utility function defined in an article by Lapan, Moschini, and Hanson (1991). The safety-first model is essentially that of Telser (1955), but enhanced to include option contracts as an additional hedging tool. Both decision-making processes have a single-period time horizon. At the beginning of the period an agent enters the futures and option markets and places a hedge. At the end of the period, the agent offsets his/her futures position and sells the commodity in the spot market. The single-period model is formulated such that a hedger can speculate on the futures price bias, but not the volatility of the option price. Results from the two competing models were derived from parameters calculated using a forecast error method on canola data spanning a ten year period (1981-90) obtained from the Winnipeg Commodity Exchange. Optimal hedging results for the two models were derived under varying levels of basis risk, futures and spot price volatilities, and risk aversion. In general, results from the expected utility model suggest that under increased volatility, uncertainty, or aversion to risk leads to a reduced open speculative position when a positive futures price bias exists. Most interestingly, unlike the comparative static results derived by Lapan, Moschini, and Hanson suggesting that if a speculative motive exists then options are used, the results from this study’s simulations suggest that the use of options are negligible. Results from assuming a safety-first decision-maker indicate that options are always used when speculating on the direction of futures price bias. When positive futures price biases increase in size, so do the futures and options positions. The opposite occurs when the bias is decreased or downward. Two major conclusions can be drawn from the safety-first results. Firstly, optimal hedging positions seem quite sensitive to “small” variations in the parameters levels. Secondly, due to the multitude of revenue distributions available from combining futures and option (which were unobtainable from using only futures) there is a possibility of very extreme outcomes even though the expected or average outcome meets the decision-maker’s “ safety” requirements. Land and Food Systems, Faculty of Graduate |
| Databáze: | Networked Digital Library of Theses & Dissertations |
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