The Use of N.Y. Cotton Futures Contracts to Hedge Cotton Price Risk in Developing Countries

Panos Varangis, Elton Thigpen and Sudhakar Satyanarayan


Cotton exports account for a significant share in total commodity exports for some developing countries, notably countries in West Africa and Central Asia. This suggests that these countries have a high exposure to cotton price volatility.

Cotton futures and options contracts could be used to hedge against short to medium term price volatility and in this way make cotton export revenues more predictable. We examined the feasibility of using New York cotton futures/options contracts as hedging instruments and found that, despite the existance of relatively high basis risk, hedging was effective in reducing cotton price volatility by 30% to 70%.

Reprinted from Proceedings of the 1994 Beltwide Cotton Conferences pp. 447 - 451
©National Cotton Council, Memphis TN

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Document last modified Sunday, Dec 6 1998