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

Author

Listed:
  • Bahram Adrangi
  • Arjun Chatrath
  • Rohan A. Christie-David
  • Mariia Guk
  • Gaurav Malik

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.

Suggested Citation

  • Bahram Adrangi & Arjun Chatrath & Rohan A. Christie-David & Mariia Guk & Gaurav Malik, 2014. "Hedging price risk when no direct hedge vehicle exists: the case of silicon," Applied Economics Letters, Taylor & Francis Journals, vol. 21(4), pages 276-279, March.
    • Handle: RePEc:taf:apeclt:v:21:y:2014:i:4:p:276-279
    DOI: 10.1080/13504851.2013.854293
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    References listed on IDEAS

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    1. Kandice H. Kahl, 1983. "Determination of the Recommended Hedging Ratio," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 65(3), pages 603-605.
    2. Beach, Charles M & MacKinnon, James G, 1978. "A Maximum Likelihood Procedure for Regression with Autocorrelated Errors," Econometrica, Econometric Society, vol. 46(1), pages 51-58, January.
    3. William W. Wilson, 1989. "Price discovery and hedging in the sunflower market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 9(5), pages 377-391, October.
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