Hedging strategy for ethanol processing with copula distributions

Iddrisu Awudu, William Wilson and Bruce Dahl

Energy Economics, 2016, vol. 57, issue C, 59-65

Abstract: It has become important for ethanol producers to hedge input and output price risks. The purpose of this paper is to analyze an ethanol-producing firm's strategy to reduce price risks for inputs and outputs. Corn is the primary input, and the outputs are ethanol, corn oil, distillers' dried grains (DDGs), and renewable identification numbers (RINs). A theoretical model is developed including margins and risk is measured using value at risk (VaR). An empirical model is developed and extended to VaR using copulas to analyze the marginal distribution and dependence structure for input and output prices on margins. Efficient frontier curves analyzing VaR with and without copula are discussed. The results compare varying risk-strategy measures for long corn, short corn, and combining short and long corn. Sensitivity analyses are conducted for functional changes in the margin as a result of ethanol price changes.

Keywords: Ethanol; Hedging; Value at risk; Copula; Efficient frontier (search for similar items in EconPapers)
JEL-codes: D81 Q13 Q42 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:57:y:2016:i:c:p:59-65

DOI: 10.1016/j.eneco.2016.04.011

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