Crude Oil Risk Management: the Optimal Hedge Ratio and Hedging Effectiveness Evolution

Erica Cristina Balea ()
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Erica Cristina Balea: Bucharest University of Economic Studies, Romania

Economia. Seria Management, 2014, vol. 17, issue 1, 181-188

Abstract: The main purpose of risk management is to reduce the cash-flows fluctuations of a company. In order to properly manage risks, the estimation of the optimal hedging ratio is needed. This paper analyzes the evolution of the optimal hedge ratio and hedging effectiveness for the Brent crude oil. Also, the relationship between the estimation period and hedge ratio, respective hedging effectiveness is studied. The results show that if the estimation period is increased, the mean and median of the hedge ratio decrease, converging to 1. Also, for longer estimation periods, the volatility of the optimal hedge ratio tends to decrease. It is found a positive relationship between the estimation period and the hedging effectiveness, with important implications on risk management strategies.

Keywords: hedging effectiveness; optimal hedge ratio; risk management; crude oil. (search for similar items in EconPapers)
JEL-codes: G11 G32 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:rom:econmn:v:17:y:2014:i:1:p:181-188

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