On the pitfalls of multi-year rollover hedges: The case of hedge-to-arrive contracts

Abstract

It is shown that it is theoretically infeasible for multi-year rollover hedge-to-arrive contracts, and for rollover hedges in general, to succeed at locking in high current prices for crops to be harvested one or more years into the future. The study utilizes 107 years of data to present strong empirical evidence that the corn market behaves remarkably similarly to what price theory predicts. Results also confirm that short historical time series are unreliable for predicting rare events. Hence, empirical studies of risk-management contracts capitalizing on unusual occurrences should use samples sufficiently large to contain a meaningful number of relevant observations.