IDEAS home Printed from https://ideas.repec.org/p/wbk/wbrwps/1792.html
   My bibliography  Save this paper

Tradeoffs from hedging oil pricerisk in Ecuador

Author

Listed:
  • Satyanarayan, Sudhakar
  • Somensatto, Eduardo

Abstract

The oil sector is critical to Ecuador's economy, contributing about 17 percent to the country's GDP. Ecuador began exporting crude oil in 1972 and over the past two and a half decades oil has become the country's most important sector. It is controlled by the government through the public enterprise, PETROECUADOR, which serves as the holding company for all state-owned petroleum operations. Movements in oil prices are of major concern to the government, and forecasts of oil prices are built into the government budget. Ecuador's macroeconomic performance depends on the oil sector's performance; shocks to the sector have economywide repercussions. The authors investigate methods to reduce risk for the country's oil exports through hedging in futures markets. They find that hedging Ecuadorian oil has significant potential for risk reduction. After simulating ex-ante cross hedges for 1991-96, they find that in each case ex-ante hedging effectively reduces risk. They calculate the tradeoffs between return and risk from hedging and find that for a risk-minimizing short hedger, a 1-percent reduction in risk would cost a reduction in return of 0.65 percent.

Suggested Citation

  • Satyanarayan, Sudhakar & Somensatto, Eduardo, 1997. "Tradeoffs from hedging oil pricerisk in Ecuador," Policy Research Working Paper Series 1792, The World Bank.
    • Handle: RePEc:wbk:wbrwps:1792
    as

    Download full text from publisher

    File URL: http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/1999/09/17/000178830_98101904054385/Rendered/PDF/multi_page.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Ederington, Louis H, 1979. "The Hedging Performance of the New Futures Markets," Journal of Finance, American Finance Association, vol. 34(1), pages 157-170, March.
    2. Ronald I. McKinnon, 1967. "Futures Markets, Buffer Stocks, and Income Stability for Primary Producers," Journal of Political Economy, University of Chicago Press, vol. 75(6), pages 844-844.
    3. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
    4. Rolfo, Jacques, 1980. "Optimal Hedging under Price and Quantity Uncertainty: The Case of a Cocoa Producer," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 100-116, February.
    5. Satyanarayan, Sudhakar & Thigpen, Elton & Varangis, Panos & DEC, 1993. "Hedging cotton price risk in Francophone African countries," Policy Research Working Paper Series 1233, The World Bank.
    6. Kroll, Yoram & Levy, Haim & Markowitz, Harry M, 1984. "Mean-Variance versus Direct Utility Maximization," Journal of Finance, American Finance Association, vol. 39(1), pages 47-61, March.
    7. Levy, H & Markowtiz, H M, 1979. "Approximating Expected Utility by a Function of Mean and Variance," American Economic Review, American Economic Association, vol. 69(3), pages 308-317, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Thomas Conlon & John Cotter & Ramazan Gençay, 2016. "Commodity futures hedging, risk aversion and the hedging horizon," The European Journal of Finance, Taylor & Francis Journals, vol. 22(15), pages 1534-1560, December.
    2. Sudhakar S. Raju, 2005. "Risk Return Trade-offs from Hedging Oil Price Risk in Ecuador," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 4(1), pages 27-41, April.
    3. Troncoso Sepúlveda, Ricardo & Cabas Monje, Juan, 2019. "Factibilidad del uso de contratos de futuros del Chicago Mercantile Exchange para la cobertura del riesgo de precio en el ganado bovino chileno," Revista Lecturas de Economía, Universidad de Antioquia, CIE, issue 90, pages 9-44, January.
    4. Andreas Röthig, 2009. "Microeconomic Risk Management and Macroeconomic Stability," Lecture Notes in Economics and Mathematical Systems, Springer, number 978-3-642-01565-6, October.
    5. Pennings, Joost M. E. & Garcia, Philip, 2004. "Hedging behavior in small and medium-sized enterprises: The role of unobserved heterogeneity," Journal of Banking & Finance, Elsevier, vol. 28(5), pages 951-978, May.
    6. Ricardo Troncoso-Sepúlveda & Juan Cabas-Monje, 2019. "Feasibility of using futures contracts of the Chicago Mercantile Exchange for hedging price risk in Chilean cattle," Lecturas de Economía, Universidad de Antioquia, Departamento de Economía, issue 90, pages 9-44, Enero - J.
    7. Markowitz, Harry, 2014. "Mean–variance approximations to expected utility," European Journal of Operational Research, Elsevier, vol. 234(2), pages 346-355.
    8. Guo, Xu & Lien, Donald & Wong, Wing-Keung, 2015. "Good Approximation of Exponential Utility Function for Optimal Futures Hedging," MPRA Paper 66841, University Library of Munich, Germany.
    9. M. Glawischnig & I. Seidl, 2013. "Portfolio optimization with serially correlated, skewed and fat tailed index returns," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 21(1), pages 153-176, January.
    10. Lence, Sergio H., 1996. "Relaxing The Assumptions Of Minimum-Variance Hedging," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 21(1), pages 1-17, July.
    11. repec:bpj:pepspp:v:18:y:2012:i:3:p:3:n:9 is not listed on IDEAS
    12. Ghosh, Asim, 1996. "Cross-Hedging Foreign Currency Risk: Empirical Evidence from an Error Correction Model," Review of Quantitative Finance and Accounting, Springer, vol. 6(3), pages 223-231, May.
    13. William T. Smith, 2022. "The optimal hedge ratio: A solution, a conjecture, and a challenge," Economics Bulletin, AccessEcon, vol. 42(2), pages 877-888.
    14. Giovanni Mastrobuoni & David A Rivers, 2019. "Optimising Criminal Behaviour and the Disutility of Prison," The Economic Journal, Royal Economic Society, vol. 129(619), pages 1364-1399.
    15. Simaan, Majeed & Simaan, Yusif & Tang, Yi, 2018. "Estimation error in mean returns and the mean-variance efficient frontier," International Review of Economics & Finance, Elsevier, vol. 56(C), pages 109-124.
    16. Emmanuel Jurczenko & Bertrand Maillet & Paul Merlin, 2008. "Efficient Frontier for Robust Higher-order Moment Portfolio Selection," Post-Print halshs-00336475, HAL.
    17. Furió, Dolores & Torró, Hipòlit, 2020. "Optimal hedging under biased energy futures markets," Energy Economics, Elsevier, vol. 88(C).
    18. Penaranda, Francisco, 2007. "Portfolio choice beyond the traditional approach," LSE Research Online Documents on Economics 24481, London School of Economics and Political Science, LSE Library.
    19. Fatma Lajeri-Chaherli, 2016. "On The Concavity And Quasiconcavity Properties Of ( Σ , Μ ) Utility Functions," Bulletin of Economic Research, Wiley Blackwell, vol. 68(3), pages 287-296, April.
    20. Harry Markowitz & Joseph Blasi & Douglas Kruse, 2010. "Employee stock ownership and diversification," Annals of Operations Research, Springer, vol. 176(1), pages 95-107, April.
    21. Jonathan Dark, 2005. "A Critique of Minimum Variance Hedging," Accounting Research Journal, Emerald Group Publishing, vol. 18(1), pages 40-49, June.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:1792. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Roula I. Yazigi (email available below). General contact details of provider: https://edirc.repec.org/data/dvewbus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.