Joost M.E. Pennings
Department of Agricultural and Consumer Economics
The University of Illinois at Urbana-Champaign
Raymond M. Leuthold
Department of Agricultural and Consumer Economics
University of Illinois at Urbana-Champaign
Abstract
We propose a development process of commodity futures contracts in which
the decisions and wishes of potential customers are investigated simultaneously
with the necessary technical properties that need to be met for trading
to take place. Within this framework the relationship between trading volume
and hedging effectiveness is examined taking both basis risk and market
depth risk into account, and the relationship between owner-manager's characteristics
and the probability of using futures is examined, taking latent variables
and the heterogeneity of owner-managers into account. The relationships
are tested on a set of data gathered in a stratified sample of 440 owner-managers
by means of computer-assisted personal interviews and on transaction-specific
futures data. Structural equation models and multiple regression models
are used to validate the relationships. The hedging effectiveness and the
variables that play a role in the owner-manager's use of futures are related
to the tools of the exchange.