Optimal hedging under nonlinear borrowing cost, progressive tax rates, and liquidity constraints
✍ Scribed by Arias, Joaqu�n; Brorsen, B. Wade; Harri, Ardian
- Publisher
- John Wiley and Sons
- Year
- 2000
- Tongue
- English
- Weight
- 285 KB
- Volume
- 20
- Category
- Article
- ISSN
- 0270-7314
No coin nor oath required. For personal study only.
✦ Synopsis
Empirical research using optimal hedge ratios usually suggests that producers should hedge much more than they do. In this study, a new theoretical model of hedging is derived. Optimal hedge and leverage ratios and their relationship with yield risk, price variability, basis risk, taxes, and financial risk are determined using alternative assumptions. The motivation to hedge is provided by progressive tax rates and cost of bankruptcy. An empirical example for a wheat and stockersteer producer is provided. Results show that there are many factors, often assumed away in the literature, that make farmers hedge little or not at all. Progressive tax rates provide an incentive for farmers to hedge in order to reduce their tax liabilities and increase their aftertax income. Farmers will hedge when the cost of hedging is less than the benefits of hedging that come from reducing tax liabilities, li-