Shi, Ruoding

May, 2022

By: Shi, Ruoding ; Isengildina Massa, Olga
This study develops a comprehensive framework to measure, explain, and anticipate the costs of futures hedging. Using historical futures prices and margin requirements, we simulate hedging costs for corn and soybeans over 2004Ð2018. Empirical distributions derived from the simulation results provide unconditional estimates of the costs of hedging as well as the probability of hedging failure. Conditional estimates assess the impact of margin requirements, price volatility, and price changes as well as seasonal patterns using quantile regressions. Our findings demonstrate that price volatility is a main driver of the costs of hedging and can be used to anticipate future hedging costs.