Transaction Frequency and Hedging in Commodity Processing

Transaction Frequency and Hedging in Commodity Processing

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This study examines the effect of transaction frequency on profit and cash flow risk for firms that periodically purchase inputs, continuously transform inputs into outputs, and periodically sell output.Soybean-processing camif draps profit and cash flows are computed for unhedged, direct-hedged, and risk-minimizing-hedged processing with up to 52 transactions per year.Findings include: (a) higher transaction frequencies result in lower unhedged profit and cash flow risk and lower hedging effectiveness, (b) anticipatory hedging provides less risk protection than ssl pure drive quad product-transformation hedging, (c) stabilizing cash flow stabilizes annual profits but the converse does not hold, and (d) hedging profits makes cash flow more variable.