Please use this identifier to cite or link to this item: http://hdl.handle.net/1893/11981
Appears in Collections:Accounting and Finance Journal Articles
Peer Review Status: Refereed
Title: Hedging long-term commodity risk
Authors: Veld-Merkoulova, Yulia V
de, Roon Frans A
Contact Email: j.w.veld-merkoulova@stir.ac.uk
Issue Date: Feb-2003
Publisher: Wiley-Blackwell for Wiley Periodicals
Citation: Veld-Merkoulova YV & de Roon FA (2003) Hedging long-term commodity risk, Journal of Futures Markets, 23 (2), pp. 109-133.
Abstract: This study focuses on the problem of hedging longer-term commodity positions, which often arises when the maturity of actively traded futures contracts on this commodity is limited to a few months. In this case, using a rollover strategy results in a highs residual risk, which is related to the uncertain futures basis. We use a one-factor term structure model of futures convenience yields in order to construct a hedging strategy that minimizes both spot-price risk and rollover risk by using futures of two different maturities. The model is tested using three commodity futures: crude oil, orange juice, and lumber. In the out-of-sample test, the residual variance of the 24-month combined spot-futures positions is reduced by, respectively, 77%, 47%, and 84% compared to the variance of a naive hedging portfolio. Even after accounting for the higher trading volume necessary to maintain a two-contract hedge portfolio, this risk reduction outweighs the extra trading costs for the investor with an average risk aversion.
Type: Journal Article
URI: http://hdl.handle.net/1893/11981
DOI Link: http://dx.doi.org/10.1002/fut.10060
Rights: The publisher does not allow this work to be made publicly available in this Repository. Please use the Request a Copy feature at the foot of the Repository record to request a copy directly from the author. You can only request a copy if you wish to use this work for your own research or private study.
Affiliation: Accounting and Finance
Tilburg University

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