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Optimal Hedging in Lumber Futures Markets

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Abstract:

This paper investigated the effectiveness of the lumber futures market in hedging unexpected price variations. The related optimum hedge ratio, i.e., the fraction of the cash position that should be hedged to minimize risk, was also studied. The measure of hedging effectiveness used was the correlation between cash and futures price, conditional on information available at the time of hedging. The analysis of weekly price data showed that during the period June 1980 to February 1985 optimum use of the lumber futures market could have reduced the variance in gain or loss by 50 to 90 percent. Longer hedges were generally more effective and so were those liquidated near the closure of the futures contract. The best strategy was to hedge the cash position entirely, except for hedges liquidated within 8 weeks of contract closure for which hedge ratios of 60 to 80 percent were most effective. Forest Sci. 32:634-642.

Keywords: Wood prices; forecasting; market efficiency

Document Type: Journal Article

Affiliations: Project Assistant, Department of Forestry, University of Wisconsin, 1630 Linden Drive, Madison, WI 53706

Publication date: September 1, 1986

More about this publication?
  • Forest Science is a peer-reviewed journal publishing fundamental and applied research that explores all aspects of natural and social sciences as they apply to the function and management of the forested ecosystems of the world. Topics include silviculture, forest management, biometrics, economics, entomology & pathology, fire & fuels management, forest ecology, genetics & tree improvement, geospatial technologies, harvesting & utilization, landscape ecology, operations research, forest policy, physiology, recreation, social sciences, soils & hydrology, and wildlife management.
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