his article considers the question, can the Australian Wheat Board (AWB) T benefit from hedging using the Chicago Board af Trade's wheat market? The AWB can use the prices generated by futures markets as guides for decision making and as a base for negotiating export contracts. In November 1982, the AWB was permitted to enter into explicit futures transactions. The law under which the Board operates limits it to taking short positions in futures. Perhaps this is not a serious limitation, because, unlike commercial firms in the United States, the Board is not buying wheat in an open market to fulfill export contracts. Rather, wheat growers receive a "pool price" derived from all sales made by the AWB. Thus, the Board need not take long positions in futures to cover forward export contracts, and in this context, this article is limited to an analysis of the potential benefits of anticipatory hedges.
The conceptual framework underlying the analysis is based on portfolio principles; however since the AWB is making decisions continuously through time, it is unrealistic to compute optimal hedge ratios for one discrete decision-period per year. In addition to allowing for multiple decisions each year, a simulation model is specified which considers quantity, price level, and basis risk. An attempt is made to include the possible constraints imposed by liquidity of the futures markets, since the AWB's positions in futures could be relatively large.
In the next section, the trading objectives of the AWB are outlined and the related objective functions specified. A simulation model is developed, and the results are presented and appraised in subsequent sections.
CONCEPTUAL MODEL
The Australian Wheat Board is like an individual wheat grower in the sense that it is a price taker; the export demand for Australian Wheat is very price elastic (Miller and White, 1980). The Board, however, has no control over plantings and must accept all wheat delivered to it. The AWB's portfolio of assets includes unhedged in-We thank Michael Hinchy and Kenneth L. Robinson for helpful comments, but we, of course, are responsible for the final content of the ankle.