Effective Basemetal Hedging: The Optimal Hedge Ratio and Hedging Horizon
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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Volume (Year): 1 (2008)
Issue (Month): 1 (December)
Pages: 1-36
| Handle: | RePEc:gam:jjrfmx:v:1:y:2008:i:1:p:41-76:d:28294 |
| Contact details of provider: | Web page: http://www.mdpi.com/
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References listed on IDEAS
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- Robert J. Myers & Stanley R. Thompson, 1989. "Generalized Optimal Hedge Ratio Estimation," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 71(4), pages 858-868.
- 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. Full references (including those not matched with items on IDEAS)
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