HEDGING WITH CROP YIELD FUTURES - A MEAN-VARIANCE ANALYSIS

This investigation into the use of new Chicago Board of Trade yield fu tures to manage price and yield risks shows that a risk-minimizing fir m can reduce its variance of profit by hedging in both markets compare d to hedging in price futures only. The greater the variance of the co ntract underlying yield, the less effective the two-instrument hedge. Hedging effectiveness of the dual strategy also depends on the price a nd yield bases, and the effect of a change in either basis depends on whether the established crop yield futures position is short or long.