This paper derives and estimates empirically the role of transactions costs
for the optimal price-risk hedge ratios for four cocoa producing SSA countries
(Cameroon, Ghana, Nigeria and Cote d’Ivoire). Using monthly data from 1966
to 2009, transaction costs are introduced in two commonly used approaches for
finding optimal hedge ratios under both price and production risk; the meanvariance approach and the logarithmic utility based approach. For the mean
variance the optimal hedge ratios for cocoa are around 0.93 and 1.0 for all
countries and different transaction costs and levels of risk aversion. For the
logarithmic utility approach, which is supposed to be a more realistic approach the hedge ratios are lower than unity, differ more across countries and are
reduced by higher transaction costs. Therefore developing appropriate market
regulations where transaction cost on intermediaries are kept to minimal is
relevant for these countries.

JEL Classification: G13, C52, Q11

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Keywords

Futures markets, optimal hedge ratio, cocoa