debate is developing over the effects of margin calls on hedgers. Many analysts A have ignored marking-to-market ' requirements of hedgers either because they assumed hedgers would have an established line of credit with a lender to cover margin calls as needed, or because they assumed the interest expense on margins was zero since T-bills or some other interest-producing security could be used as collateral for margin requirements while hedges were held. For example, Peterson and Leuthold (1987) exclude margin call effects from their analysis of cattle hedging strategies, describing them as trivial. Yet, in the same issue of the Journal of Futures Markets, Kenyon and Clay (1987) find margin effects to be significant when hedging hogs due to the capital liquidity problems created for producers. Also, in financial markets, Chang and Loo (1987) find that the marking-to-market feature of futures trading alters some price relationships.
The central issue of the debate over margin effects is the amount of "hedging reserve" capital needed to meet a hedger's desired probability level of covering all marking-tomarket requirements. Analysts who have ignored margin requirements of hedgers implicitly assume there is no need to consider the size of reserves (sometimes called "variation margin"') because there are no impediments to capital availability or no significant costs associated with using capital for futures hedging. This is equivalent to assuming there is a frictionless market for hedging capital. However, Schmiesing, Edelman, Swinson, and Kolman (1985) show that access to funds and interest rates paid vary among individual firms. Therefore, it is expected that transactions costs associated with reserves will vary also. This means that costs can be significant for some firms, as argued by Kenyon and Clay (1987) and Berck (198 1); but Peterson and Luethold (1987) disagree. The first step in clarifying this debate is to determine the size of hedging reserve requirements so that estimates of associated transaction costs can be measured.
This article addresses the issues related to determining the threshold level of funding required for uninterrupted operation as a futures hedger and presents a simple model for use in empirical assessments of this question. Initially, the model is limited to only futures markets in the very short term. Then the model is expanded to cover long-term "'Marking-to-market" or "daily resettlement" is the process used by futures exchanges to adjust account balances at the end of each trading day to insure market liquidity. All losses incurred must be met by a cash payment, even if the position remains open. Any profits accrued to futures positions may be used to cover losses, and surplus profits can be withdrawn in cash if desired.
*"Hedging reserves" or "variation margin" is the capital required to compensate for reductions in a hedger's equity in a futures position. This is the amount which must be marked-to-market.