Optimal Hedging Levels and Hedging Effectiveness in Cattle Feeding
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Optimal hedging level, minimum-risk hedging level, and hedging effectiveness are defined in a manner
consistent with portfolio theory and used to analyze hedging potential in cattle feeding. Estimated
upper limits on optimal hedging levels ranged from 0.56 to 0.88 unit of short futures per unit of four
types of slaughter cattle produced at five locations. When futures trading costs are taken into account,
optimal hedging levels are depressed below these limits, depending upon the resource availabilities and
profit expectations of individual firms. Location, grade, and sex of the cattle fed have small effects on
optimal hedging levels and hedging effectiveness.