Theses and Dissertations

Advisor

Maples, William E.

Committee Member

Harri, Ardian

Committee Member

Maples, Joshua G.

Committee Member

Coatney, Kalyn

Date of Degree

8-13-2024

Original embargo terms

Visible MSU Only 1 year

Document Type

Graduate Thesis - Campus Access Only

Major

Agriculture (Agricultural Economics)

Degree Name

Master of Science (M.S.)

College

College of Agriculture and Life Sciences

Department

Department of Agricultural Economics

Abstract

The main objective of this study is to analyze the effects cotton quality has on hedging and basis movements within the cotton market to help market participants minimize price risk. The effectiveness of using cotton futures in hedging price risk will be determined by calculating optimal hedge ratios by tenderable quality. Hedge ratios will be calculated using simple differences and error correction models (ECM) on overlapping price data, estimated under both generalized least squares (GLS) and maximum likelihood estimation (MLE). An empirical analysis shows that as cotton quality improves, the optimal hedge ratio decreases. ECMs estimated under GLS are found to be most efficient. It is also found that cotton classing data by quality has no significant effect on cotton basis. Farmers and merchandisers can take these results as a framework to better manage price and basis risk in the hedge and speculative scenarios.

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