Potential demand for hedging by Australian wheat producers
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The potential for hedging Australian wheat with the new Sydney Futures
Exchange wheat contract is examined using a theoretical hedging model parametised from previous studies. The optimal hedging ratio for an `average' wheat
farmer was found to be zero under reasonable assumptions about transaction
costs and based on previously published measures of risk aversion. The estimated
optimal hedging ratios were found by simulation to be quite sensitive to assumptions about the degree of risk aversion. If farmers are significantly more risk
averse than is currently believed, then there is likely to be an active interest in the
new futures market.