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Effective Basemetal Hedging: The Optimal Hedge Ratio and Hedging Horizon

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  • Michaël Dewally

    ()
    (Marquette University, 1250 W. Wisconsin Ave., Milwaukee, WI 53233, USA)

  • Luke Marriott

    (MillerCoors LLC, 250 South Wacker Drive, Chicago, IL 60606, USA)

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    Abstract

    This study investigates optimal hedge ratios in all base metal markets. Using recent hedging computation techniques, we find that 1) the short-run optimal hedging ratio is increasing in hedging horizon, 2) that the long-term horizon limit to the optimal hedging ratio is not converging to one but is slightly higher for most of these markets, and 3) that hedging effectiveness is also increasing in hedging horizon. When hedging with futures in these markets, one should hedge long-term at about 6 to 8 weeks with a slightly greater than one hedge ratio. These results are of interest to many purchasing departments and other commodity hedgers.

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    Bibliographic Info

    Article provided by MDPI, Open Access Journal in its journal Journal of Risk and Financial Management.

    Volume (Year): 1 (2008)
    Issue (Month): 1 (December)
    Pages: 41-76

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    Handle: RePEc:gam:jjrfmx:v:1:y:2008:i:1:p:41-76:d:28294

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    1. Pesaran, M Hashem, 1997. "The Role of Economic Theory in Modelling the Long Run," Economic Journal, Royal Economic Society, vol. 107(440), pages 178-91, January.
    2. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
    3. Anderson, Ronald W & Danthine, Jean-Pierre, 1981. "Cross Hedging," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1182-96, December.
    4. 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.
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    Cited by:
    1. Mara Madaleno & Carlos Pinho, 2010. "Hedging Performance and Multiscale Relationships in the German Electricity Spot and Futures Markets," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 3(1), pages 26-62, December.
    2. Dinica, Mihai Cristian & Armeanu, Daniel, 2014. "The Optimal Hedging Ratio for Non-Ferrous Metals," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 105-122, March.

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