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Effective Basemetal Hedging: The Optimal Hedge Ratio and Hedging Horizon

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  • Michaël Dewally

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

  • Luke Marriott

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

Abstract

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.

Suggested Citation

  • Michaël Dewally & Luke Marriott, 2008. "Effective Basemetal Hedging: The Optimal Hedge Ratio and Hedging Horizon," JRFM, MDPI, vol. 1(1), pages 1-36, December.
    • Handle: RePEc:gam:jjrfmx:v:1:y:2008:i:1:p:41-76:d:28294
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    References listed on IDEAS

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    Cited by:

    1. Mara Madaleno & Carlos Pinho, 2010. "Hedging Performance and Multiscale Relationships in the German Electricity Spot and Futures Markets," JRFM, MDPI, vol. 3(1), pages 1-37, December.
    2. Čech, František & Zítek, Michal, 2022. "Marine fuel hedging under the sulfur cap regulations," Energy Economics, Elsevier, vol. 113(C).
    3. Dinica, Mihai Cristian & Armeanu, Daniel, 2014. "The Optimal Hedging Ratio for Non-Ferrous Metals," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 105-122, March.
    4. George E. Halkos & Apostolos S. Tsirivis, 2019. "Energy Commodities: A Review of Optimal Hedging Strategies," Energies, MDPI, vol. 12(20), pages 1-19, October.

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