Document Type

Other

Publication Date

4-1-2003

Keywords

cattle, basis risk, serial contracts

Extension Number

ExEx 5049

Department

Economics

Description

The Chicago Mercantile Exchange (CME) recently introduced serial futures contracts for live cattle. Essentially, this means contracts will be available for each month of the year. An obvious benefit of the additional contracts is a potential reduction in basis risk. Basis risk results when the actual basis, the difference between the cash price received and the futures price, differs from the expected basis. During 2002 the basis during non-delivery months was relatively wide, resulting in reduced income for cattle feeders who tried to hedge price risk. In this paper, serial contracts are examined to determine their usefulness to hedgers. Then, basis levels and risk are examined. Less basis risk would lead to improved profitability projections for cattle feeding. Should hedgers adopt the serial contracts, they will need updated basis information to properly forecast basis for any new contract months.

Download
COinS