BASIS RISK AND HEDGING STRATEGIES FOR AUSTRALIAN WHEAT EXPORTS

Basis risk can play a significant role in the determination of effective hedging strategies. In this paper a portfolio framework is developed to examine the effect of basis risk on hedging strategies for Australian wheat exports. Monthly data for the period 1977 to 1984 were used to implement the analytical framework. While the traditional definition of hedging implies a hedge ratio of unity, the results of this research show that the average ratio of optimal hedge to stockholding is well below unity. Evolving market conditions can also cause the optimal hedge ratio to vary substantially over time