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Effective Basemetal Hedging: The Optimal Hedge Ratio and Hedging Horizon

  • Michaël Dewally

    ()

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

  • Luke Marriott

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

Registered author(s):

    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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    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. Anderson, Ronald W & Danthine, Jean-Pierre, 1981. "Cross Hedging," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1182-96, December.
    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. 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.
    4. Abdur R. Chowdhury, 1991. "Futures market efficiency: Evidence from cointegration tests," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 11(5), pages 577-589, October.
    5. Donald Lien & Xiangdong Luo, 1993. "Estimating multiperiod hedge ratios in cointegrated markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 13(8), pages 909-920, December.
    6. Pesaran, M.H., 1996. "The Role of Economic Theory in Modelling the Long Run," Cambridge Working Papers in Economics 9612, Faculty of Economics, University of Cambridge.
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