Effectiveness of hedging within the high price volatility context

The instability of prices and the hypothesis that speculative behaviour was one of its sources has brought renewed interest in the futures markets. In this paper, we concentrate on the European wheat futures markets (feed and milling) and the CBOT’s wheat contract as a comparison. The purpose of the paper is to study whether those markets still allow substitution price risk for basis risk. This implicitly is a test of whether the increasing presence of speculation in futures market have made them divorced from the physical markets, and therefore, not useful for commercial entities. We study two aspects: efficiency and hedging effectiveness and our results indicate that there are still a good connection between physical and futures markets, and therefore, hedging can still play an important role protecting commodity handlers against price volatility.