In response to the development of the U.S. ethanol industry, the Chicago Board of Trade (CBOT)launched the ethanol futures contract in March 2005. This contract is promoted by the CBOT asallowing ethanol producers to hedge corn crushing using strategies similar to those used insoybean crushing....

This study focuses on hedging effectiveness defined as the proportionate price risk reduction created by hedging. By mathematical and simulation analysis we determine the following: (a) the regression R2 in the hedge ratio regression will generally overstate the amount of price risk reduction...

Hedging effectiveness is the proportion of price risk removed through hedging. Empiricalhedging studies typically estimate a set of risk minimizing hedge ratios, estimate the hedgingeffectiveness statistic, apply the estimated hedge ratios to a second group of data, and examinethe robustness of...