Relaxing standard hedging assumptions in the presence of downside risk

We analyze how the introduction of a downside risk measure and less restrictive assumptions in the standard hedging problem changes the optimal hedge and the opportunity costs of not hedging. Based on a dataset of futures and cash returns for soybeans and S&P 500 returns, the findings indicate that the optimal hedge changes considerably when a one-sided risk measure is adopted and standard assumptions are relaxed. Further, the results suggest that in a downside risk framework with realistic hedging assumptions there is little or no incentive for producers to hedge as the opportunity cost of not hedging is small.