Alternative Estimates of Optimal Hedge Ratio For Corn, Soybeans, Cattle, and Hogs

This study compares estimates of optimal hedge ratio for corn, soybeans, cattle, and hogs, by using three univariate regression models and two multivariate models. The empirical results indicate that the multivariate regression models are statistically better than the univariate ones. The estimates of the multivariate regression models suggest that farmers in Iowa can choose optimal hedge ratios for corn ranging from 0.35 to 0.81, for soybeans ranging from 0.64 to 0.93, for cattle ranging from 0.35 to 0.60, and for hogs ranging from 0.12 to 0.45, depending on the maturity of the contract. The estimates of hedging effectiveness show that the price risk is expected to reduced by an average of 49%, 68%, 18%, and 16% for the production of corn, soybeans, cattle, and hogs, respectively.