Crude Oil Hedging by Futures

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Mohammdi, Marjan | 2012

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Type of Document: M.Sc. Thesis
Language: Farsi
Document No: 43644 (44)
University: Sharif University of Technology
Department: Management and Economics
Advisor(s): Keshavarz Hadad, Gholamreza; Zamani, Shiva
Abstract:
Risk in crude oil price is likely to occur due to changes in global oil demand, capacity of crude oil production and regional crisis. A future contract is the instrument primarily designed to hedge one’s exposure to unwanted risk. Hedging policies often implements through different hedge ratios estimation.
This study examines the performance of several econometrics models namely OLS, GARCH,BEKK,VECM-BEKK for the returns of West Texas Intermediate(WTI) oil spot and futures prices from 3 January 1995 to 31December 2010, to calculate static and daily time varying minimum variance optimal hedge ratios and suggest a crude oil hedge strategy.
We show that hedging effectiveness indicate that VECM-BEKK is the best model for Optima hedge ratio calculation in terms of reducing variance of the portfolio.Finally out-of-sample hedging effectiveness of the semi nonparametric model yields superior performance relative to extensive class of parametric GARCH model.
Keywords:
Hedging ; Crude Oil ; Optical Hedge Ratio ; Future Contract ; General Autoregressive Conditional Heteroskedastic (GARCH) ; Hedging Effectiveness ; Error Correction

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