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Futures hedging of commodity risk : designing hedging strategies with a focus on the study of the optimal hedge ratio

Kocks, Tobias (2015) Futures hedging of commodity risk : designing hedging strategies with a focus on the study of the optimal hedge ratio.

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Abstract:This thesis seeks to design futures hedging strategies for spot exposures of the three agricultural commodities corn, wheat, and soy. The most important variable in a futures hedge is the optimal hedge ratio (OHR), i.e., the ratio of the position in futures contracts relative to the spot position. To keep the analysis traceable, the thesis considers hedging strategies under the minimum-variance and the mean-variance objective function. Under both of these functions, the second moments of the joint distribution of the spot and futures security are the main drivers in determining the OHR. Since those moments (i.e., the covariance matrix) can be estimated unconditionally as well as conditionally, the main quest was to investigate in how far time-varying, dynamic, econometric models (EWMA, DCC, and Diagonal BEKK) could outperform the static, time-invariant OLS model. It is found that while the dynamic models seem to add little benefit in the minimum-variance context, they, for some commodities, generate superior risk-return outcomes compared to static hedge ratios.
Item Type:Essay (Master)
Clients:
De Heus, Ede, Netherlands
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:85 business administration, organizational science
Programme:Industrial Engineering and Management MSc (60029)
Link to this item:http://purl.utwente.nl/essays/66885
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