Feeder cattle cash settlement: Hedging risk reduction or illusion?

An investigation is undertaken to ascertain how cash settlement issues have influenced hedging conditions at the individual market level and for the feeder cattle industry in general. Cash settlement is estimated to be responsible for a 7.25% decline in hedging risk for the feeder cattle industry; y...

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Bibliographic Details
Published in:The journal of futures markets 1993-08, Vol.13 (5), p.497-514
Main Authors: Rich, Don R., Leuthold, Raymond M.
Format: Article
Language:English
Subjects:
Cattle
Cattle industry
Economic models
Economic theory
Futures market
Hedging
Livestock industry
Regression analysis
Risk assessment
Risk management
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Summary:An investigation is undertaken to ascertain how cash settlement issues have influenced hedging conditions at the individual market level and for the feeder cattle industry in general. Cash settlement is estimated to be responsible for a 7.25% decline in hedging risk for the feeder cattle industry; yet, the individual market results tend to be ambiguous. The overall conclusions, however, are not completely negative. While not statistically linked to the introduction of cash settlement, it is found that maturity basis risk has declined slightly at most individual markets. This, combined with mean bases converging distinctly closer to zero at expiration, which appears to be clearly attributable to the presence of cash settlement, implies that the settlement change enhances contract performance in general.
ISSN:0270-7314
1096-9934
DOI:10.1002/fut.3990130505