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Hedging strategy for crude oil trading and the factors influencing hedging effectiveness

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  • Yun, Won-Cheol
  • Jae Kim, Hyun
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    Abstract

    This study analyzes the hedging effectiveness of different hedge type and period by Korean oil traders. Both crude oil price and exchange rate risks are considered. Theoretical models are formulated to estimate the hedge ratios by separate and complex hedge types. The hedging period covers 1-12 months. This study also performs some statistical works to investigate the relationship between the hedging effectiveness and the crude oil price sensitivity to exchange rate. In addition, the relationship between the hedging effectiveness and the volatilities of crude oil price and exchange rate is analyzed.

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    Bibliographic Info

    Article provided by Elsevier in its journal Energy Policy.

    Volume (Year): 38 (2010)
    Issue (Month): 5 (May)
    Pages: 2404-2408

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    Handle: RePEc:eee:enepol:v:38:y:2010:i:5:p:2404-2408

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    Web page: http://www.elsevier.com/locate/enpol

    Related research

    Keywords: Crude oil Complex hedge Hedging effectiveness;

    References

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    1. Ederington, Louis H, 1979. "The Hedging Performance of the New Futures Markets," Journal of Finance, American Finance Association, vol. 34(1), pages 157-70, March.
    2. Lapan, Harvey E. & Moschini, GianCarlo, 1994. "Futures Hedging Under Price, Basis and Production Risk," Staff General Research Papers 10041, Iowa State University, Department of Economics.
    3. Govindaray N. Nayak & Calum G. Turvey, 2000. "The Simultaneous Hedging of Price Risk, Crop Yield Risk and Currency Risk," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 48(2), pages 123-140, 07.
    4. Reed, Michael R. & Zhang, Qiang & Maynard, Leigh J., 2007. "Hedging Decisions of Importing Firms for U.S. Commodity with Multiple Risks: The case of Soybeans," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 9897, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    5. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May.
    6. Haigh, Michael S. & Holt, Matthew T., 2002. "Hedging Foreign Currency, Freight And Commodity Futures Portfolios: A Note," Working Papers 28573, University of Maryland, Department of Agricultural and Resource Economics.
    7. Massell, Benton F, 1969. "Price Stabilization and Welfare," The Quarterly Journal of Economics, MIT Press, vol. 83(2), pages 284-98, May.
    8. Michael S. Haigh & Matthew T. Holt, 2000. "Hedging Multiple Price Uncertainty in International Grain Trade," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(4), pages 881-896.
    9. Tomislav Vukina & Dong-feng Li & Duncan M. Holthausen, 1996. "Hedging with Crop Yield Futures: A Mean-Variance Analysis," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(4), pages 1015-1025.
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    Cited by:
    1. Su, EnDer, 2013. "Stock index hedge using trend and volatility regime switch model considering hedging cost," MPRA Paper 49190, University Library of Munich, Germany.
    2. Nongnuch Tantisantiwong, 2013. "Price Transmission and Effects of Exchange Rates on Domestic Commodity Prices via Offshore and Currency Hedging," Dundee Discussion Papers in Economics 278, Economic Studies, University of Dundee.

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