Journal or Book Title
Journal of Agricultural and Resource Economics
First Page or Article ID Number
The most important minimum-variance hedge-ratio assumptions are (a) that production is deterministic and (b) that all of the agent's wealth is invested in the cash position. Stochastic production greatly reduces optimal hedge ratios. An alternative investment greatly reduces opportunity costs of not hedging by "diluting" the cash position. Stochastic production and/or alternative investments render the costs associated with hedging relatively more important, yielding almost negligible net benefits of hedging. Hence, hedging costs typically dismissed in hedging models for being seemingly negligible are important determinants of hedging behavior.
Western Agricultural Economics Association
Lence, Sergio H., "Relaxing the Assumptions of Minimum-Variance Hedging" (1996). Economics Publications. 34.