Offshore hedging strategy of Japan-based wheat traders under multiple sources of risk and hedging costs

Japan-based international wheat traders face multiple risks from the changes in wheat prices and exchange rates. This study shows that Japanese wheat importers would employ futures hedging in the CBOT and/or TIFFE to reduce the risks, although there is no wheat futures trading in Japan. For the importers, hedging in the CBOT and TIFFE might accompany some costs in addition to transaction and opportunity costs, such as additional transaction cost as a foreign trader and a relatively higher bid-ask spread due to a large volume of trade. Thus, introducing hedging costs in an offshore hedging model for the traders is necessary, and it may change optimal hedging ratios in both futures markets. Empirical results show that costs in the hedging activities are at play in determining optimal hedging positions in the markets.