Hedging performance of shrimp futures contracts with multiple deliverable grades

The performance of the black tiger and white shrimp futures contracts trade d in the Minneapolis Grain Exchange (MGE) is considered. These two futures contracts have suffered low trader participation since their inception desp ite the underlying multibillion-dollar cash shrimp market. The article trie s to find answers for such lack of interest in the context of the multiple deliverable category character of both contracts. In particular, the hedgin g effectiveness and the adequacy of the premiums/discounts are measured for the various shrimp size categories traded in each contract. The analyses i ndicate that the hedging effectiveness of both contracts is relatively mode st. Part of the explanation for the performance of the contracts resides in high deliverable category exchange option values, which stem from volatili ty in the price differentials between size categories. The fixed premiums/d iscounts are not able to provide a remedy to the alternation in the cheapes t to deliver category. There is also a liquidity problem that could result from the peculiarities of seafood trade. It is concluded that the lack of t rader interest may be influenced by initial high deliverable category excha nge option values. (C) 1999 John Wiley & Sons, Inc.