On the Pitfalls of Multi‐Year Rollover Hedges: The Case of Hedge‐To‐Arrive Contracts

13 Pages Posted: 24 Mar 2020

See all articles by Sergio H. Lence

Sergio H. Lence

Iowa State University - Department of Economics

Marvin Hayenga

Iowa State University - Department of Economics

Date Written: February 2001

Abstract

It is shown that it is theoretically infeasible for multi‐year rollover hedge‐to‐arrive contracts, and for rollover hedges in general, to succeed at locking in high current prices for crops to be harvested one or more years into the future. The study utilizes 107 years of data to present strong empirical evidence that the corn market behaves remarkably similarly to what price theory predicts. Results also confirm that short historical time series are unreliable for predicting rare events. Hence, empirical studies of risk‐management contracts capitalizing on unusual occurrences should use samples sufficiently large to contain a meaningful number of relevant observations.

Keywords: contract, grain market, hedge, hedge‐to‐arrive, risk management, G130, Q130

Suggested Citation

Lence, Sergio H. and Hayenga, Marvin, On the Pitfalls of Multi‐Year Rollover Hedges: The Case of Hedge‐To‐Arrive Contracts (February 2001). American Journal of Agricultural Economics, Vol. 83, Issue 1, pp. 107-119, 2001, Available at SSRN: https://ssrn.com/abstract=3558147 or http://dx.doi.org/10.1111/0002-9092.00140

Sergio H. Lence (Contact Author)

Iowa State University - Department of Economics ( email )

260 Heady Hall
Ames, IA 50011
United States

Marvin Hayenga

Iowa State University - Department of Economics ( email )

260 Heady Hall
Ames, IA 50011
United States

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