Hedging under uncertainty: Price risk management for cocoa exporting countries
2013 (English)Conference paper, Presentation (Refereed)
For commodity-exporting countries in the Sub-Saharan African (SSA), for which a few primary agricultural products revenues represent a substantial portion of total government income, volatilities in prices could compromise the public balances of these governments and destabilize the economies. This research derives and estimates empirically the cocoa price risk optimal hedge ratio and strategy for a producing SSA country that is subject to volatility in both the price and the production. This objective is addressed by focusing on expected utility maximization (EUM) under the assumptions of mean-variance and logarithmic utilities frameworks to derive optimal hedge ratios for Cameroon, Ghana, Nigeria and Cote d’Ivoire. We relaxed two traditional assumptions of EUM to better reflect reality. Simulating within the range of various risk parameters and transaction costs, the optimal hedge ratios prescribed for the study show no significant differences among the countries, with the hedge ratios closer to unity. The hedge ratios prescribed by the logarithmic utility function is well below unity for various range of transactional cost. The study finds that, for weakly and strongly risk averse investors hedge ratios tend to increase monotonically as the risk aversion level increases. Therefore developing appropriate market regulations where transaction cost on intermediaries are kept to minimal is relevant for these countries.
Place, publisher, year, edition, pages
Futures markets, optimal hedge ratio, transaction costs, cocoa
IdentifiersURN: urn:nbn:se:liu:diva-102729OAI: oai:DiVA.org:liu-102729DiVA: diva2:681226
18th Annual Conference on Econometric Analysis and Policy Challenges in Africa, Africa Econometric Society, 24-26 July 2013, Accra, Ghana