Increased use of alternative fuels and low commodity prices have contributed to the recent expansion of the ethanol industry. As with any competitive industry, there exists some level of output price risk in the form of volatility. Yet, no actively traded ethanol futures market exists to transfer output price risk to. This study reports estimated minimum variance cross-hedge ratios between Michigan spot cash ethanol and the New York Mercantile Exchange (NYMEX) unleaded gasoline futures for 1-, 4-, 8-, 16-, and 24-week hedging periods. The research yields two results. First, the appropriate quantity of ethanol to hedge with one 42,000 NYMEX unleaded gasoline futures contract for each respective hedging period is realized. Second, the magnitude of the quantities of ethanol required to implement an effective minimum variance cross-hedge ratio is recognized as a possible deterrent to ethanol buyers and sellers from entering into a cross-hedge.
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Paper provided by University of Missouri Columbia, Department of Agricultural Economics in its series Working Papers with number
26035.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Anderson, Ronald W & Danthine, Jean-Pierre, 1981.
"Cross Hedging,"
Journal of Political Economy,
University of Chicago Press, vol. 89(6), pages 1182-96, December.
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