Transaction Frequency and Hedging in Commodity Processing

This study examines Freeride / Freestyle the effect of transaction frequency on profit and cash flow risk for firms that periodically purchase inputs, continuously transform inputs into outputs, and periodically sell output.Soybean-processing profit and cash flows are computed for unhedged, direct-hedged, and risk-minimizing-hedged processing with up to 52 transactions per year.Findings include: (a) higher transaction frequencies result in lower unhedged profit and cash flow risk and lower hedging effectiveness, (b) anticipatory hedging provides less risk protection than product-transformation hedging, (c) stabilizing cash flow stabilizes Necklace Charm annual profits but the converse does not hold, and (d) hedging profits makes cash flow more variable.