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| Pannell, David J.; Hailu, Getu; Weersink, Alfons; Burt, Amanda. |
| The use by farmers of futures contracts and other hedging instruments has been observed to be low in many situations, and this has sometimes seemed to be considered surprising or even mysterious. We propose that it is, in fact, readily understandable and consistent with rational decision making. Standard models of the decision about optimal hedging show that it is negatively related to basis risk, to quantity risk, and to transaction costs. Farmers who have less uncertainty about prices have a lower optimal level of hedging. If a farmer has optimistic price expectations relative to the futures market, the incentive to hedge can be greatly reduced. And finally, farmers who have low levels of risk aversion have little to gain from hedging in terms of risk... |
| Tipo: Working or Discussion Paper |
Palavras-chave: Hedging; Risk; Risk aversion; Flat payoff functions; Agricultural Finance. |
| Ano: 2007 |
URL: http://purl.umn.edu/9232 |
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