Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/258483 
Year of Publication: 
2021
Citation: 
[Journal:] Journal of Risk and Financial Management [ISSN:] 1911-8074 [Volume:] 14 [Issue:] 8 [Article No.:] 379 [Publisher:] MDPI [Place:] Basel [Year:] 2021 [Pages:] 1-10
Publisher: 
MDPI, Basel
Abstract: 
Since the collapse of the Metallgesellschaft AG due to hedging losses in 1993, energy practitioners have been concerned with the ability to hedge long-dated linear and non-linear oil liabilities with short-dated futures and options. This paper identifies a model-free non-parametric approach to extrapolating futures prices and implied volatilities. When we expand the analysis to implementing hedge portfolios for long-dated futures or option contracts over the time period 2007-2017, we utilize the useful benchmark of hedge ratios arising from Schwartz and Smith. With respect to the empirical consequences of hedging long-dated futures and options with their short-dated counterparts, we find that the long-term tracking errors are, on average, quite close to zero, but there is increasing risk entailed in attempting to do so, as the hedge-tracking errors for both futures and option contracts increase with time-to-maturity.
Subjects: 
hedging
long-dated
oil futures
option contracts
JEL: 
G12
G13
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

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