The purpose of the paper is to reexamine cash settlement of lean hog futures contracts as a
\nhedging tool, focusing on basis behavior and management of basis risk. To understand the
\ndimensions of the situation, first we compare hog futures contract basis level, variability, and exante
\nbasis risk measured in terms of forecast ability between physical delivery and cash
\nsettlement using data from 1985 to 2008 on hog cash and future prices. We then examine the
\nhedging usefulness of the current CME lean hog index and provide an alternative hedging
\ninstrument\u2014a regional basis contract\u2014that takes into account location differences between
\nregional cash prices and the CME lean hog index. Our results indicate that basis has widened and
\nits variability prior to expiration has increased in the cash settlement period. However, we find
\nno evidence to suggest that ex-ante basis risk has increased, meaning that the ability to forecast
\nbasis prior to expiration has declined little with cash settlement. Routine hedging with futures
\ncontracts as expected reduces the variability in returns compared to cash sales. Including
\nlocation differences further reduces the variability in cash prices. Our results should be of value
\nto users of the hog futures markets and market analysts that offer pricing advice.<\/p>\n","protected":false},"excerpt":{"rendered":"
The purpose of the paper is to reexamine cash settlement of lean hog futures contracts as a hedging tool, focusing on basis behavior and management of basis risk. To understand the dimensions of the situation, first we compare hog futures contract basis level, variability, and exante basis risk measured in terms of forecast ability between […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[8882,2096,7028,65,7029,7030,34,20282,17460,9626,7031,1675,48,10858,10859,14784,4257,7032,2365,7416,20911,4874,24533,2446],"class_list":["post-4904","post","type-post","status-publish","format-standard","hentry","category-economics","tag-al","tag-alternative","tag-basis-behavior","tag-behavior","tag-cash-settlement","tag-ex-ante-basis-risk","tag-hog","tag-hog-price-risk-management","tag-lean-hog-futures-physical-settlement-cash-settlement-comments","tag-lean-hogs-futures-cash-settle","tag-lean-hogs-futures-contract","tag-location","tag-management","tag-mark","tag-nat","tag-ness","tag-prices","tag-regional-basis","tag-risk","tag-sales","tag-t","tag-tan","tag-user","tag-variability"],"_links":{"self":[{"href":"http:\/\/prairieswine.com\/rsc\/wp-json\/wp\/v2\/posts\/4904","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/prairieswine.com\/rsc\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/prairieswine.com\/rsc\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/prairieswine.com\/rsc\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/prairieswine.com\/rsc\/wp-json\/wp\/v2\/comments?post=4904"}],"version-history":[{"count":0,"href":"http:\/\/prairieswine.com\/rsc\/wp-json\/wp\/v2\/posts\/4904\/revisions"}],"wp:attachment":[{"href":"http:\/\/prairieswine.com\/rsc\/wp-json\/wp\/v2\/media?parent=4904"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/prairieswine.com\/rsc\/wp-json\/wp\/v2\/categories?post=4904"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/prairieswine.com\/rsc\/wp-json\/wp\/v2\/tags?post=4904"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}