Revista de Economia e Sociologia Rural
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Revista de Economia e Sociologia Rural
Original article

IMPACTS OF CASH SETTLEMENT ON THE HEDGING EFFICIENCY IN FUTURES CONTRACTS OF LIVE CATTLE

Luiz Gonzaga de Castro Junior; Pedro Valentim Marques.

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Abstract

Cash settlement is a mechanism that practically eliminates all the problems concerning futures contracts settlement through spot delivery, leading to an increase in its use by market agents. Given the power of this specification, the main upcoming problem is the participants' distrust towards the price index that best represents the physical market. This work was developed to verify the impact that different specifications for price indexes may have upon live cattle futures contracts traded at the BM&F. From the results, it can be verified that all specifications show a high degree of hedging efficiency, and that the specifications weighted by a cheaper location probability presented the lowest variances.

Keywords

financial settlement, futures contracts, price index.

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