Evaluation of the interaction of risk management tools for cotton and soybeans

The interaction of alternative insurance designs with futures hedging and the purchase of options is examined in this article. A numerical analysis is conducted using a revenue simulation model that incorporates futures prices, basis, and yield variability. Four alternative yield and revenue crop insurance designs are evaluated. Optimal futures and at-the-money put option hedge ratios are derived for expected utility maximizing cotton and soybean producers. Our findings indicate that the alternative insurance designs do influence forward pricing levels. Alternative behavioral assumptions are shown to influence the optimal hedge. Also, yield insurance generally complements forward pricing while pure revenue insurance generally has a negative effect. Other insurance designs currently offered have an effect on the optimal hedge that falls between the two extremes of yield insurance and pure revenue insurance.