Evaluating the Hedging Potential of the Lean Hog Futures Contract

Ditsch, Mark; Leuthold, Raymond M.

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https://hdl.handle.net/2142/4061 Copy

Description

Title

Evaluating the Hedging Potential of the Lean Hog Futures Contract

Author(s)

• Ditsch, Mark
• Leuthold, Raymond M.

Issue Date

1996-08

Keyword(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.

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 Name or Number

OFOR Working Paper Series, no. 96-03

Type of Resource

text

Language

en

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http://hdl.handle.net/2142/4061

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