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- Title
Hedging Long-Dated Oil Futures and Options Using Short-Dated Securities--Revisiting Metallgesellschaft.
- Authors
Doran, James S.; Ronn, Ehud I.
- 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 shortdated 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
ENERGY futures; HEDGING (Finance); FUTURES market; FUTURES sales &; prices; FUTURES; SECURITIES; OPTIONS (Finance)
- Publication
Journal of Risk & Financial Management, 2021, Vol 14, Issue 8, p1
- ISSN
1911-8066
- Publication type
Article
- DOI
10.3390/jrfm14080379