Virginia's regional grain prices exhibit high volatility due to the state's unique spatial variability and supply and demand fundamentals. This study explains Virginia's basis patterns for corn, soybeans, and wheat. Discussion of times when there were outstanding economic or fundamental market movers that affected basis in Virginia is also offered. The feasibility and process of hedging using futures is explained and evaluated in a case study. Possible marketing decisions based on the findings are presented in an easy and accessible manner, so that producers and extension agents can use this information to make real-time grain marketing decisions. / Master of Science / Virginia's regional grain prices exhibit high volatility due to the state's unique spatial variability and supply and demand fundamentals. This study explains Virginia's basis patterns for corn, soybeans, and wheat. Discussion of times when there were outstanding economic or fundamental market movers that affected basis in Virginia is also offered. The feasibility and process of hedging using futures is explained and evaluated in a case study. Possible marketing decisions based on the findings are presented in an easy and accessible manner, so that producers and extension agents can use this information to make real-time grain marketing decisions.

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Commodity options add a new dimension to grain farmers’ marketing alternatives. Producers of pain can now effectively ensure themselves a floor price without the risk of production shortfalls resulting in losses due to overhedged positions. The purpose of this study was to determine optimum hedge levels using both commodity options and futures contracts and then compare the hedging tools given various location, crop mix, and levels of financial leverage. The study used portfolio theory where hedging strategies were simulated over time and minimum-variance hedge levels determined. Crop diversification and financial leverage were addressed using Quadratic Programming techniques. Selected strategies were tested over a new data set. Commodity options are superior to futures contracts as a hedging tool for early season hedges. This was particularly true for crops with highly variable yields. The results also indicate that commodity options are a viable alternative for reducing long-run income variation and that crop diversification reduced income variation but did not reduce the overall need to hedge. The study presented here is unique in a number of ways. Initially, very little if any published work is available on hedging pain with commodity options contracts. Secondly, the study addresses hedging strategies under the realm of production uncertainty. Finally, the study demonstrates there are E-V efficient alternatives to strict cash sales. / Ph. D. / incomplete_metadata

M.S.

All firms should aim to reduce their risks and avoid bankruptcy. One way they try to lessen their chance of bankruptcy, or entering into a financially distressed state, is by using risk management techniques. Part of risk management is using derivatives, which many firms rely on today to reduce their exposure to certain types of risk and avoid a cash flow crunch. I test the notion that hedging reduces the probability of bankruptcy. Hedging reduces risks such as interest rate and currency risk, and these types of risk can send a firm into financial distress. Financial distress can result in bankruptcy, so hedging should then ultimately reduce the risk of bankruptcy.

The use of futures contracts has grown enormously in recent years. From 1979 to 1985 the number of futures contracts traded literally doubled. Most of the growth can be attributed to the development of recent contract innovations. Trading in financial futures, alone, increased sixteen fold over this period. This remarkable rise in futures usage and the importance of innovation highlights the constant struggle by exchanges to develop and initiate successful contracts. However, there is no known process for actually identifying potentially successful contracts. lt is this general question of what leads to a successful contract that forms the initiative behind this work. Formally, this study is a theoretical and empirical analysis of futures usage. The purpose of the theoretical section is to develop a model of contract usage that leads to a set of testable hypotheses about the determinants of contract use. Usage is defined in this study as being measured by the number of contracts in existence at a certain time. The theoretical work is general in the sense that it is not directed at behavior in one specific contract; but rather, it rests on the belief that certain underlying fundamental economic factors will affect, in general, usage in all futures contracts. The theoretical model is based upon firm behavior in an uncertain world with the firm having the ability to enter a portfolio of futures contracts. The purpose of the empirical section is to provide support for the theoretical section by determining, through time series analysis, which fundamental variables affect futures usage and how these effects are transmitted. The exogenous variables center upon the variance-covariance matrix of actual price series, transactions costs, and production levels. The empirical results yield strong support for the theoretical section developed in this work and the overall portfolio approach. Additionally, the results draw into question the importance of several variables which have classically been considered essential in determining usage. While the results strongly support the model and the portfolio perspective, they did not suggest a specific set of variables that uniquely determine contract usage across a wide set of different contracts. / Ph. D. / incomplete_metadata

The main objective of this study is to analyze the effects cotton quality has on hedging and basis movements within the cotton market to help market participants minimize price risk. The effectiveness of using cotton futures in hedging price risk will be determined by calculating optimal hedge ratios by tenderable quality. Hedge ratios will be calculated using simple differences and error correction models (ECM) on overlapping price data, estimated under both generalized least squares (GLS) and maximum likelihood estimation (MLE). An empirical analysis shows that as cotton quality improves, the optimal hedge ratio decreases. ECMs estimated under GLS are found to be most efficient. It is also found that cotton classing data by quality has no significant effect on cotton basis. Farmers and merchandisers can take these results as a framework to better manage price and basis risk in the hedge and speculative scenarios.

Arithmetic Asian options are difficult to price and hedge, since, at the present, no closed-form analytical solution exists to price them. This difficulty, moreover, has led to the development of various methods and models used to price these instruments. The purpose of this thesis is two-fold. First, we present an overview of the literature. Secondly, we develop a pseudo-analytical method proposed by Geman and Yor and present an accurate and relatively quick algorithm which can be used to price European-style arithmetic Asian options and their hedge parameters. / Master of Science

MASTER THESIS ABSTRACT TITLE: Trading Strategy in Incomplete Market AUTHOR: Tomáš Bunčák DEPARTMENT: Department of Probability and Mathematical Statistics, Charles University in Prague SUPERVISOR: Andrea Karlová We focus on the problem of finding optimal trading strategies (in a meaning corresponding to hedging of a contingent claim) in the realm of incomplete markets mainly. Although various ways of hedging and pricing of contingent claims are outlined, main subject of our study is the so-called mean-variance hedging (MVH). Sundry techniques used to treat this problem can be categorized into two approaches, namely a projection approach (PA) and a stochastic control approach (SCA). We review the methodologies used within PA in diversely general market models. In our research concerning SCA, we examine the possibility of using the methods of optimal stochastic control in MVH, and we study the problem of our interest in several settings of market models; involving cases of pure diffusion models and a jump- diffusion case. In order to reach an exemplary comparison, we provide solutions of the MVH problem in the setting of the Heston model via techniques of both of the approaches. Some parts of the thesis are accompanied with numerical illustrations.