Empirical Hedging Performance on Long-Dated Crude Oil Derivatives

Cheng, Benjamin; Nikitopoulos, Christina Sklibosios; Schlögl, Erik

doi:10.2139/ssrn.2840622

Cited by 3 publications

(3 citation statements)

References 13 publications

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“…Finally, the long-term mean level of interest rates and the correlation between the spot process and the interest rate process do not affect the hedging performance. We also validate the numerical efficiency of factor hedging that is suited for multi-dimensional models, similarly to the ones considered in Cheng, Nikitopoulos, and Schlögl (2016a).…”

Section: Resultsmentioning

confidence: 69%

“…The four different maturities 1 , 2 , 3 and 4 represent the maturities of the hedging futures and forwards with 2000, 1800, 1200 and 600 trading days, respectively. In all cases, the maturity of the bond contracts is 2000 trading days.crease in trading volumes of longer-dated commodity derivatives, especially crude oil options, subsequent work byCheng et al (2016a) empirically analyses the hedging performance on long-dated crude oil futures options market data.…”

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confidence: 99%

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Hedging Futures Options with Stochastic Interest Rates

2016

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This paper presents a simulation study of hedging long-dated futures options, in the Rabinovitch (1989) model which assumes correlated dynamics between spot asset prices and interest rates. Under this model and when the maturity of the hedging instruments match the maturity of the option, forward contracts and futures contracts can hedge both the market risk and the interest rate risk of the options positions. When the hedge is rolled forward with shorter maturity hedging instruments, then bond contracts are additionally required to hedge the interest rate risk. This requirement becomes more pronounced for longer maturity contracts and amplifies as the interest rate volatility increases. Factor hedging ratios are also considered, which are suited for multi-dimensional models, and their numerical efficiency is validated.

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Section: Resultsmentioning

confidence: 69%

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confidence: 99%

Hedging Futures Options with Stochastic Interest Rates

2016

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“…The results show that futures hedging is more effective when the near-month contract is used". Cheng et al (2016) focus exclusively on the hedging of long-dated option contracts. Guo (2017) considers risk measures for oil, natural gas, gasoil, heating and electricity futures contracts.…”

Section: Introductionmentioning

confidence: 99%

Hedging Long-Dated Oil Futures and Options Using Short-Dated Securities—Revisiting Metallgesellschaft

Doran¹,

Ronn

2021

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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.

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