Authors: Luděk Benada
Addresses: Faculty of Economics and Administration, Department of Finance, Masaryk University, Lipova 41a, 602 00 Brno, Czech Republic
Abstract: The paper examines price risk hedging for crude oil and natural gas. The aim of the research is to compare the success rate of hedging and subsequently formulate recommendations for applying a particular model to investigated commodities. The subjects of research are the spot prices of West Texas Intermediate and the Henry Hub. The risk protection is provided by an application of futures contracts. The hedge ratio is determined using ordinary least squares (OLS), Naïve portfolio, Copula and generalised autoregressive conditional heteroskedasticity (GARCH). Afterwards, the ability of the received weights to reduce the risk is measured by hedging effectiveness over two years. The results confirmed that the applied model for crude oil is rather irrelevant in comparison to natural gas, where the employed models provided significant differences in hedging effectiveness. Overall, in the case of natural gas all the applied models were unable to generate satisfactory hedging results.
Keywords: hedging; futures; naïve portfolio; minimum variance; hedge ratio; hedging effectiveness.
International Journal of Trade and Global Markets, 2018 Vol.11 No.4, pp.323 - 333
Received: 15 Nov 2017
Accepted: 02 Sep 2018
Published online: 01 Jan 2019 *