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.
| Identifer | oai:union.ndltd.org:MSSTATE/oai:scholarsjunction.msstate.edu:td-7270 |
| Date | 13 August 2024 |
| Creators | Epperson, Jacob |
| Publisher | Scholars Junction |
| Source Sets | Mississippi State University |
| Detected Language | English |
| Type | text |
| Format | application/pdf |
| Source | Theses and Dissertations |
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