Introduction
he Common Agricultural Policy (CAP) of the European Community (EC) does not T impose any control on the trade of soybeans and soybean products. Therefore the EC domestic price should track the free market world price. Contrary to the case of wheat and corn, then, the potential importance of hedging soybean meal price risk is clear. Yet, hedging is not a common practice for the purchasing manager of the average Italian feed compounding company. This suggests that hedging is either technically very difficult, due to outdated Italian legislation, or not effective, or both.
Evidence of the former is unquestionable. This article empirically investigates the second possibility by addressing the following questions. Is it possible to hedge soybean meal price risk in Italy using the Chicago Board of Trade meal and the International Monetary Market Deutsche mark futures? What is the out-of-sample hedging effectiveness that can be achieved by trading jointly determined commodity and currency minimum variance hedge ratios? How does the out-of-sample results compare with the in-sample results? Does the minimum variance approach produce out-of-sample results that are superior to the one obtained with a naive hedge?
THE PROBLEM
The Italian feed compounding sector operates within the protective mechansim provided by the CAP. This has benefited the feed compounding sector that enjoys relatively limited price risk, at least by North American standards, for most of its input needs other