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Understanding Risk in Hedge to Arrive Contracts

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Abstract

Hedge-to-arrive contracts range from relatively simple, low-risk non-rolling versions in which basis risk is the main area of risk exposure, to much more complex types that allow producers to roll (change delivery dates) and permit the next year's crop to be priced initially with old-crop futures contracts. In extreme cases, these contracts have been used to price several years' production through an initial position in old-crop futures. Contracts that involve inter-year rolling of HTAs have extreme risk exposure. Multi-year rolling HTAs are extremely high-risk speculative instruments, and can be much more risky than speculat-ing in the futures market. They are neither price protection nor risk management tools.

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