Hedging price risk when no direct hedge vehicle exists: the case of silicon

Bahram Adrangi, Arjun Chatrath, Rohan A. Christie-David, Mariia Guk and Gaurav Malik

Applied Economics Letters, 2014, vol. 21, issue 4, 276-279

Abstract: Silicon has wide applications in the electronic, ferrous foundry and chemical industries but does not possess a well-developed forward or futures market. Here we investigate potential candidates to cross-hedge silicon's price risk. Our results show that a proxy for a newly introduced Chicago Mercantile Exchange (CME) ferrous contract, iron and steel scrap, explains close to 60% of the variation in silicon price changes. Estimated Generalized Least Squares (EGLS) estimations of hedge ratios are shown to produce more consistent hedge-effectiveness over OLS counterparts. Thus, it appears that the ferrous contract could fulfil this role.

Date: 2014
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DOI: 10.1080/13504851.2013.854293

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