Authors: Moawia Alghalith; Ricardo Lalloo; Martin Franklin; Christos Floros
Addresses: Economics Department, UWI, St. Augustine, Trinidad. ' Economics Department, UWI, St. Augustine, Trinidad. ' Economics Department, UWI, St. Augustine, Trinidad. ' Department of Economics, University of Portsmouth, Richmond Building, Portland Street, Portsmouth, PO1 3DE, UK; Department of Finance and Insurance, TEI of Crete, Crete, 72100, Greece
Abstract: Previous research assumes that 1) the futures price is a linear function of the market (spot) price and basis risk; 2) the spot price and basis risk are statistically independent. Using a general form of basis risk, we provide empirical comparative statics results. Moreover, we relax the statistical independence assumption. Our monthly data series covers the period March 2000 to 2010, and includes the Henry Hub spot price, futures price and the quantity of natural gas and the hedged quantity. The results show that 1) an increase in the price riskiness increases the optimal hedge; 2) a higher basis risk implies a riskier hedging; 3) a higher correlation between the prices implies a riskier hedging.
Keywords: gas futures; spot prices; basis risk; hedging risk; natural gas; price risk.
International Journal of Financial Markets and Derivatives, 2011 Vol.2 No.3, pp.244 - 248
Published online: 18 Sep 2011 *Full-text access for editors Access for subscribers Purchase this article Comment on this article