scholarly journals Hedging the Price Risk Inherent in Revenue Protection Insurance

2021 ◽  
pp. 1-21
Author(s):  
Sweta Tiwari ◽  
Keith H. Coble ◽  
Barry J. Barnett ◽  
Ardian Harri
Keyword(s):  
Behavioral Model ◽  
Price Risk ◽  
Put Options ◽  
Call Options ◽  
Option Returns ◽  
Hedge Ratios ◽  
Revenue Insurance ◽  
Yield Risk ◽  
Risk Protection ◽  
Optimal Hedge

Abstract Crop revenue insurance is unique, because it involves a guarantee subsuming yield risk and highly systematic price risk. This study examines whether crop insurers could use options instead of, or in addition to, assigning policies to the Commercial Funds of the USDA Federal Crop Insurance Corporation (FCIC) as per the Standard Reinsurance Agreement (SRA) to hedge the price risk of revenue insurance policies. The behavioral model examines the optimal hedge ratio for a crop insurer with a book of business consisting of corn Revenue Protection (RP) policies. Results show that a mix of put and call options can hedge the price risk of the RP policies. The higher optimal hedge ratios of call options as compared to put options imply that the risk of increased liability due to upside price risk can be hedged using options better than downside price risk. This study also analyzed the combination of options with the SRA at 35, 50, and 75% retention levels. The zero optimal hedge ratios at each retention level and the negative correlation between RP indemnities and the option returns when the crop insurer mixed options and SRA suggest that the purchasing of options provides no additional risk protection to crop insurers beyond what is provided by the SRA despite retention limits.

Does hedging in futures market benefit Indian farmers?

2014 ◽  
Vol 31 (3) ◽  
pp. 291-308
Author(s):  
Thiagu Ranganathan ◽  
Usha Ananthakumar
Keyword(s):  
Risk Aversion ◽  
Futures Markets ◽  
Price Expectations ◽  
Content Type ◽  
Indian Context ◽  
Hedge Ratios ◽  
Yield Risk ◽  
Potential Benefits ◽  
Trading Volumes ◽  
Optimal Hedge

Purpose – The purpose of this paper is to perform an analysis of potential benefits from usage of the futures markets for the farmers. The national commodity exchanges were established in India in the year 2003-2004. Though there has been a spectacular growth in trading volumes in these exchanges, participation of farmers in these markets has been very low. Efforts are being made to increase the awareness and participation of farmers in these markets. As such efforts are being made, it is critical to analyse the potential benefits from usage of the futures markets for the farmers. Our study performs such an analysis for soybean farmers in the Dewas district of Madhya Pradesh state in India. Design/methodology/approach – The authors estimate the optimal hedge ratios in futures markets for farmers in different scenarios characterised by varying levels of different parameters relevant to the farmer. For these optimal hedge ratios, we then estimate the benefits from hedging defined as the change in certainty equivalent income (CEI) due to hedging. Findings – Results indicate that the CEI gain due to hedging is positively related to the farmer’s risk aversion and inversely related to farmer’s price expectations and transaction costs. Also, only when the risk aversion is high, the CEI gain is positively related to the natural hedge. Thus, for a farmer with high risk aversion, hedging acts as a substitute to the natural hedge. Originality/value – This is the first study that analyses the hedging for farmer in the Indian context by considering yield risk while doing so. Also, their study establishes a relationship between risk aversion, the natural hedge and benefits from hedging in futures markets for the farmer.

MULTIPLE RESCINDABLE OPTIONS AND THEIR PRICING

2009 ◽  
Vol 12 (04) ◽  
pp. 545-575 ◽  
Author(s):  
NIKOLAI DOKUCHAEV
Keyword(s):  
Interest Rate ◽  
American Options ◽  
American Option ◽  
Market Model ◽  
Put Options ◽  
Call Options ◽  
Pricing Rules ◽  
Risk Protection

We suggest a modification of an American option such that the option holder can exercise the option early before the expiration and can revert later this decision to exercise; it can be repeated a number of times. This feature gives additional flexibility and risk protection for the option holder. A classification of these options and pricing rules are given. We found that the price of some call options with this feature is the same as for the European call. This means that the additional flexibility costs nothing, similarly to the situation with American and European call options. For the market model with zero interest rate, the price of put options with this feature is also the same as for the standard European put options. Therefore, these options can be more competitive than the standard American options.

Examining the Hedging Effectiveness of Futures Contracts over Pre and Post Financial Crisis Period: Evidence from National Stock Exchange of India

2015 ◽  
Vol 3 (2) ◽  
Author(s):  
Kapil Gupta ◽  
Mandeep Kaur
Keyword(s):  
Financial Crisis ◽  
Stock Exchange ◽  
Futures Contracts ◽  
Price Risk ◽  
Hedge Ratio ◽  
Crisis Period ◽  
Hedging Effectiveness ◽  
Hedge Ratios ◽  
Time Invariant

Present study examines the efficiency of futures contracts in hedging unwanted price risk over highly volatile period i.e. June 2000 - December 2007 and January 2008 – June 2014, pre and post-financial crisis period, by using S&PC NXNIFTY, CNXIT and BANKNIFTY for near month futures contracts. The hedge ratios have been estimated by using five methods namely Ederingtons Model, ARMA-OLS, GARCH (p,q), EGARCH (p,q) and TGARCH (p,q). The study finds that hedging effectiveness increased during post crisis period for S&PC NXNIFTY and BANKNIFTY. However, for CNXIT hedging effectiveness was better during pre-crisis period than post crisis. The study also finds that time-invariant hedge ratio is more efficient than time-variant hedge ratio.

scholarly journals HOW EFFECTIVE IS FUTURES AS AN INSTRUMENT OF HEDGING AGAINST PRICE RISK? -A STUDY BASED ON SPOT AND FUTURE PRICES OF GOLD

2016 ◽  
Vol 4 (9) ◽  
pp. 143-150
Author(s):  
Shafeeque Muhammad ◽  
Thomachan
Keyword(s):  
Spot Market ◽  
Futures Market ◽  
Price Risk ◽  
Time Varying ◽  
Risk Hedging ◽  
Hedging Effectiveness ◽  
Cash Market ◽  
Hedge Ratios ◽  
Opposite Position

This paper examines the role of commodity futures market as an instrument of hedging against price risk. Hedging is the practice of offsetting the price risk in a cash market by taking an opposite position in the futures market. By taking a position in the futures market, which is opposite to the position held in the spot market, the producer can offset the losses in the latter with the gains in the former. Both static and time varying hedge ratios have been calculated using VECM-MGARCH model. Variance of return from hedge portfolio has been found to be low. Further hedging effectiveness has been observed to be around 12%.

The effects of overconfident yield forecasting on cross-coverage level crop insurance demand

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Clayton P. Michaud
Keyword(s):  
Crop Insurance ◽  
Insurance Coverage ◽  
Coverage Level ◽  
Insurance Demand ◽  
Management Tools ◽  
Content Type ◽  
Revenue Insurance ◽  
Yield Risk ◽  
Yield Forecasting ◽  
Yield Insurance

PurposeThis paper examines the effect of overconfident yield forecasting (optimism bias) on crop insurance coverage level choices across both yield and revenue insurance.Design/methodology/approachThis study simulates a representative producer’s preferred coverage level for both yield and revenue insurance under three potential models of decision-making and four potential manifestations of overconfident yield forecasting. The study then uses this framework to examine how coverage level choices change as overconfidence increases (decreases).FindingsAs overconfidence increases, producers prefer lower levels of crop insurance coverage than they would otherwise prefer, with extreme overconfidence inducing farmers to buy no insurance at all. While overconfidence affects cross-coverage demand for revenue and yield insurance similarly, this effect is more pronounced for yield insurance. Cross-coverage level demand for revenue insurance is relatively stable across changes in the correlation between prices and yields.Practical implicationsThis research has important implications for crop insurance subsidy design and crop insurance demand modeling.Originality/valueThere is a growing body of literature suggesting that producers are overconfident with regard to their future yield risk and that this bias reduces their willingness to pay for risk management tools such as crop insurance. This is the first study to look at how such overconfidence affects cross-coverage level demand for crop insurance.

scholarly journals Impact of Risk Preferences on Crop Rotation Choice

1997 ◽  
Vol 26 (1) ◽  
pp. 106-114 ◽  
Author(s):  
Leigh J. Maynard ◽  
Jayson K. Harper ◽  
Lynn D. Hoffman
Keyword(s):  
Crop Rotation ◽  
Crop Rotations ◽  
Price Risk ◽  
Risk Averse ◽  
Government Programs ◽  
Yield Data ◽  
Farm Bill ◽  
Cropping Practices ◽  
Yield Risk ◽  
Experimental Yield

Stochastic dominance analysis of five crop rotations using twenty-one years of experimental yield data returned results consistent with Pennsylvania cropping practices. The analysis incorporated yield risk, output price risk, and rotational yield effects. A rotation of two years corn and three years alfalfa hay dominated for approximately risk neutral and risk averse preferences, as did participation in government programs under the 1990 Farm Bill. Crop rotation selection appeared to impact net revenues more than the decision to participate in government programs.

scholarly journals What They Did Not Tell You about Algebraic (Non-) Existence, Mathematical (IR-)Regularity and (Non-) Asymptotic Properties of the Full BEKK Dynamic Conditional Covariance Model

2019 ◽  
Vol 12 (2) ◽  
pp. 66 ◽  
Author(s):  
Michael McAleer
Keyword(s):  
Dynamic Models ◽  
Asymptotic Properties ◽  
Regularity Conditions ◽  
Covariance Model ◽  
Conditional Covariance ◽  
Risky Assets ◽  
Volatility Models ◽  
Hedge Ratios ◽  
Covariance Models ◽  
Optimal Hedge

Persistently high negative covariances between risky assets and hedging instruments are intended to mitigate against risk and subsequent financial losses. In the event of having more than one hedging instrument, multivariate covariances need to be calculated. Optimal hedge ratios are unlikely to remain constant using high frequency data, so it is essential to specify dynamic covariance models. These values can either be determined analytically or numerically on the basis of highly advanced computer simulations. Analytical developments are occasionally promulgated for multivariate conditional volatility models. The primary purpose of the paper is to analyze purported analytical developments for the most widely-used multivariate dynamic conditional covariance model to have been developed to date, namely the Full BEKK model, named for Baba, Engle, Kraft and Kroner. Dynamic models are not straightforward (or even possible) to translate in terms of the algebraic existence, underlying stochastic processes, specification, mathematical regularity conditions, and asymptotic properties of consistency and asymptotic normality, or the lack thereof. The paper presents a critical analysis, discussion, evaluation and presentation of caveats relating to the Full BEKK model, and an emphasis on the numerous dos and don’ts in implementing the Full BEKK and related non-Diagonal BEKK models, such as Triangular BEKK and Hadamard BEKK, in practice.

Risk Management with KOSDAQ50 Index Futures Markets

2003 ◽  
Vol 11 (2) ◽  
pp. 51-79
Author(s):  
Gyu Hyeon Mun ◽  
Jeong Hyo Hong
Keyword(s):  
Garch Model ◽  
Minimum Variance ◽  
Price Risk ◽  
Risk Minimization ◽  
Index Futures ◽  
Hedging Strategies ◽  
Hedging Effectiveness ◽  
Hedge Ratios ◽  
Sample Data ◽  
Hedging Performance

This paper studies hedging strategies that use the KOSDAQ50 index futures to hedge the price risk of the KOSDAQ50 index spot portfolio. This study uses the minimum variance hedge model and bivariate ECT-GARCH (1,1) model as hedging models, and analyzes their hedging performances. The sample period covers from January 31, 2001 to December 31, 2002. The most important findings may be summarized as follows. First, both the risk-minimization and GARCH model exhibit hedge ratios that are substantially lower than one. Hedge ratios of the risk-minimization tend to be higher than those of GARCH model. Second, for the in-sample data, hedging effectiveness of GARCH model is higher than that of the risk-minimization, while for the out-of-sample data, hedging effectiveness of the risk-minimization with constant hedge ratios is not far behind the GARCH model in its hedging performance. Third, the hedging performance of KOSDAQ50 index futures is lower than that of KOSPI200 index futures, but higher than that of KTB futures. In conclusion, in the KOSDAQ50 index market, investors are encouraged to use the simple risk-minimization model to hedge the price risk of KOSDAQ50 spot portfolios.

Sign in / Sign up

Export Citation Format

Share Document