Hedging salmon price risk

Abstract

Salmon price is highly volatile and hard to predict, which obscures planning decisions and raises financing costs for market participants. This study considers hedging the spot price uncertainty with salmon futures contracts. It employs a new framework of hedging under square loss, consisting of a new objective function, an optimal hedge ratio and a measure of hedging effectiveness. The new framework aims at minimizing the expected squared forecast error. It generalizes the classical minimum variance hedging as it relaxes the assumption of known expected prices. The salmon futures contracts deliver satisfactory hedging performance, albeit constrained by low liquidity. Therefore, I suggest holding the contract through maturity rather than closing the futures and the spot positions simultaneously. This strategy alleviates the liquidity issue and saves transaction costs. All things considered, hedging with salmon futures is a moderately effective way of handling the salmon price uncertainty.

Hedging salmon price risk