A Comparison of Selected Cotton Hedges for Arizona Cotton Producers

Abstract

Cotton options on futures began trading in the fall of 1984 offering Arizona cotton producers an alternative risk management tool. Advantages of hedging with cotton options include: limiting risk, preserving unlimited profit potential, providing increased marketing flexibility and greater liquidity. This study compared selected cotton option hedges utilizing mean net revenues and standard deviations. Also, computed premiums were calculated with a modified Black-Scholes option pricing model to identify a historical price volatility that consistently signaled favorable cotton option trades.