Title: Optimal hedging in a processing environment: a case of ethanol production

Authors: William Wilson; Kristopher Skadberg; Iddrisu Awudu; Bruce Dahl; Mariama Yakubu

Addresses: Department of Agribusiness and Applied Economics, North Dakota State University, Fargo, ND 58108-6050, USA ' Department of Agribusiness and Applied Economics, North Dakota State University, Fargo, ND 58108-6050, USA ' Quinnipiac University, 275 Mt. Carmel Avenue, Hamden, Ct. 06518, USA ' Deceased; formerly of: North Dakota State University, USA ' Fire Science and Emergency Management Department, University of New Haven, 300 Boston Post Rd, West Haven, CT 06516, USA

Abstract: Hedging is an important strategy to reduce risk for most processing firms. In this paper, we determine optimal hedging strategies for an ethanol processing firm with input (corn), and outputs [ethanol, distillers dried grain soluble (DDGs), and corn oil]. Strategic decisions regarding alternative underlying cash and futures positions, in addition to hedge ratios, quantity of ethanol and corn to buy or sell, and co-products are considered in this work. We develop portfolio optimisation models with different risk (hedging) specifications that incorporate copula distributions to evaluate among alternative hedging strategies. The results indicate lower standard deviations for traditional hedges with higher returns using ethanol futures (specifically ethanol platt futures). Meanwhile, we find that hedging ethanol using a short position has a higher standard deviation and a lower value-at-risk (VaR) than an unhedged ethanol position.

Keywords: revenue; renewable energy; hedging; copula.

DOI: 10.1504/IJRM.2021.120346

International Journal of Revenue Management, 2021 Vol.12 No.3/4, pp.192 - 212

Received: 19 Oct 2020
Accepted: 06 Apr 2021
Published online: 17 Jan 2022 *

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