Hedging with a generalised basis risk: empirical results

Moawia Alghalith, Ricardo Lalloo, Martin Franklin and Christos Floros

International Journal of Financial Markets and Derivatives, 2011, vol. 2, issue 3, 244-248

Abstract: Previous research assumes that 1) the futures price is a linear function of the market (spot) price and basis risk; 2) the spot price and basis risk are statistically independent. Using a general form of basis risk, we provide empirical comparative statics results. Moreover, we relax the statistical independence assumption. Our monthly data series covers the period March 2000 to 2010, and includes the Henry Hub spot price, futures price and the quantity of natural gas and the hedged quantity. The results show that 1) an increase in the price riskiness increases the optimal hedge; 2) a higher basis risk implies a riskier hedging; 3) a higher correlation between the prices implies a riskier hedging.

Keywords: gas futures; spot prices; basis risk; hedging risk; natural gas; price risk. (search for similar items in EconPapers)
Date: 2011
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