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Risk Return Trade-offs from Hedging Oil Price Risk in Ecuador

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  • Sudhakar S. Raju

Abstract

This paper analyses methods to reduce the price risk of Ecuadorian oil exports through hedging in the oil futures market. I simulate ex ante cross hedges over the 1991–96 period and find that in every case, ex ante hedging would have been effective in reducing risk. I provide quantitative estimates of the return/risk trade-offs from hedging Ecuadorian oil and find that for risk minimising short hedges, a 1 per cent reduction in risk would have cost a reduction in return of 0.65 per cent. In sum, I find that oil futures hedging offers Ecuador significant risk-reduction potential.

Suggested Citation

  • Sudhakar S. Raju, 2005. "Risk Return Trade-offs from Hedging Oil Price Risk in Ecuador," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 4(1), pages 27-41, April.
    • Handle: RePEc:sae:emffin:v:4:y:2005:i:1:p:27-41
    DOI: 10.1177/097265270400400102
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    References listed on IDEAS

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    1. Ronald I. McKinnon, 1967. "Futures Markets, Buffer Stocks, and Income Stability for Primary Producers," Journal of Political Economy, University of Chicago Press, vol. 75(6), pages 844-844.
    2. Rolfo, Jacques, 1980. "Optimal Hedging under Price and Quantity Uncertainty: The Case of a Cocoa Producer," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 100-116, February.
    3. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
    4. Satyanarayan, Sudhakar & Thigpen, Elton & Varangis, Panos & DEC, 1993. "Hedging cotton price risk in Francophone African countries," Policy Research Working Paper Series 1233, The World Bank.
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    Cited by:

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    2. Jamshed Y. Uppal & Syeda Rabab Mudakkar, 2014. "Mitigating Vulnerability to Oil Price Risk— Applicability of Risk Models to Pakistan’s Energy Problem," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 53(3), pages 293-308.

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