Effective Basemetal Hedging: The Optimal Hedge Ratio and Hedging Horizon

Michaël Dewally and Luke Marriott
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Michaël Dewally: Marquette University, 1250 W. Wisconsin Ave., Milwaukee, WI 53233, USA
Luke Marriott: MillerCoors LLC, 250 South Wacker Drive, Chicago, IL 60606, USA

JRFM, 2008, vol. 1, issue 1, 1-36

Abstract: This study investigates optimal hedge ratios in all base metal markets. Using recent hedging computation techniques, we find that 1) the short-run optimal hedging ratio is increasing in hedging horizon, 2) that the long-term horizon limit to the optimal hedging ratio is not converging to one but is slightly higher for most of these markets, and 3) that hedging effectiveness is also increasing in hedging horizon. When hedging with futures in these markets, one should hedge long-term at about 6 to 8 weeks with a slightly greater than one hedge ratio. These results are of interest to many purchasing departments and other commodity hedgers.

Keywords: n/a (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (4)

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