Master of Science / Department of Agricultural Economics / Ted C. Schroeder / Risk management decision makers face significant price risk when purchasing or selling wholesale beef. Previous research has identified cross-hedging wholesale beef in Live Cattle futures as a plausible means of reducing this risk.
Changes in the way beef is marketed have led to poor performance of cross-hedging programs. Unlike earlier research, more recent studies have shown that Live Cattle futures are a poor venue for effective cross-hedging. This study replicates previous research to evaluate the current state of traditional cross-hedging performance. Focus then shifts to improving cross-hedging methods.
Hedge ratios derived from a traditional cross-hedging methodology exhibit a great deal of sensitivity to season, estimation technique, and quality grade. Basis risk is abundant for this type of cross-hedging.
To reduce the basis risk inherent with cross-hedging wholesale beef, bundling is proposed. This involves combining two or more cuts together in a single unit to be cross-hedged. Firms merchandising meat from a whole carcass would be able to provide a valuable risk management service if the basis risk faced when hedging a bundled product is less than the basis risk faced when cross-hedging the corresponding products independently.
This research found that bundling has neither a positive or negative effect on basis risk. Therefore bundling is a plausible practice, but will not offer reduced basis risk to decision makers.
| Identifer | oai:union.ndltd.org:KSU/oai:krex.k-state.edu:2097/4943 |
| Date | January 1900 |
| Creators | Bieroth, Casey W. |
| Publisher | Kansas State University |
| Source Sets | K-State Research Exchange |
| Language | en_US |
| Detected Language | English |
| Type | Thesis |
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