Hedging Prime Interest Rate and Bank for Cooperatives Rates by Using Financial Futures for South Dakota Agricultural Cooperatives

The main objective of this study is to evaluate the feasibility of hedging the· prime interest rate and Bank for Cooperatives seasonal rates with financial futures for South Dakota agricultural cooperatives. Most agricultural cooperatives borrow mainly from commercial banks and the Bank for Cooperatives, and the rates depend on the prime rate and Bank for Cooperatives seasonal loan rates (BC rates). This study will examine whether a local cooperative might use financial futures to hedge these two interest rates. Local cooperatives must identify whether hedging is feasible for their seasonal loan with the commercial bank or Bank for Cooperatives. Also, three Bank for Cooperatives· seasonal rates will be examined to see if differences exist. They are Omaha, Spokane and St Paul rates. In this study, hedging strategy will be based on the portfolio model which assumes that the hedger desires to minimize the variance of the portfolio\u27s returns. The hedger\u27s loan portfolio consists of hedged and unhedged positions. A risk minimizing hedge ratio is an estimated coefficient that indicates the proportion of the loan portfolio to be hedged