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Evaluating the Hedging Potential of the Lean Hog Futures Contract

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Title: Evaluating the Hedging Potential of the Lean Hog Futures Contract
Author(s): Ditsch, Mark; Leuthold, Raymond M.
Subject(s): cash meat live hog futures
Abstract: The lean hog futures contract is replacing the live hog futures contract at the Chicago Mercantile Exchange beginning with the February 1997 contract. The lean hog futures will be cash settled based on a broad-based lean hog price index, eliminating terminal markets from the price discovery process. Using this index over a twenty-month period as a proxy for the lean hog futures price, this paper compares the hedging effectiveness of the live hog futures contract to the hedging potential of the lean hog futures contract for cash live hogs as well as four cash meat cuts. Frozen pork bellies futures are also examined for the cash meats. Both long-term and short-term hedges are simulated, using the minimum-variance approach, which utilizes only unconditional information, and the Myers-Thompson approach that incorporates conditional information. The results show that the lean hog futures should perform better than either the live hog or the frozen pork bellies futures as a hedging instrument for Omaha cash hogs and cash loins. The strongest evidence of this is for the short-term hedging of cash hogs. For the other three meats, no futures contract demonstrated a clear hedging advantage.
Issue Date: 1996-08
Publisher: Office for Futures and Options Research, Department of Agricultural Economics, College of Agricultural, Consumer, and Environmental Sciences at the University of Illinois at Urbana-Champaign
Series/Report: OFOR Working Paper Series, no. 96-03
Genre: Working / Discussion Paper
Type: Text
Language: English
URI: http://hdl.handle.net/2142/4061
Publication Status: published or submitted for publication
Peer Reviewed: not peer reviewed
Date Available in IDEALS: 2008-03-18
 

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