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Crude Oil Risk Management: the Optimal Hedge Ratio and Hedging Effectiveness Evolution

Author

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  • Erica Cristina BALEA

    (Bucharest University of Economic Studies, Romania)

Abstract

The main purpose of risk management is to reduce the cash-flows fluctuations of a company. In order to properly manage risks, the estimation of the optimal hedging ratio is needed. This paper analyzes the evolution of the optimal hedge ratio and hedging effectiveness for the Brent crude oil. Also, the relationship between the estimation period and hedge ratio, respective hedging effectiveness is studied. The results show that if the estimation period is increased, the mean and median of the hedge ratio decrease, converging to 1. Also, for longer estimation periods, the volatility of the optimal hedge ratio tends to decrease. It is found a positive relationship between the estimation period and the hedging effectiveness, with important implications on risk management strategies.

Suggested Citation

  • Erica Cristina BALEA, 2014. "Crude Oil Risk Management: the Optimal Hedge Ratio and Hedging Effectiveness Evolution," Economia. Seria Management, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 17(1), pages 181-188, June.
    • Handle: RePEc:rom:econmn:v:17:y:2014:i:1:p:181-188
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    Cited by:

    1. Chiou-Wei, Song-Zan & Chen, Sheng-Hung & Zhu, Zhen, 2020. "Natural gas price, market fundamentals and hedging effectiveness," The Quarterly Review of Economics and Finance, Elsevier, vol. 78(C), pages 321-337.

    More about this item

    Keywords

    hedging effectiveness; optimal hedge ratio; risk management; crude oil.;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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