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Dynamic hedging strategies: an application to the crude oil market

Author

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  • Delphine Lautier

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • Alain Galli

    (CERNA i3 - Centre d'économie industrielle i3 - Mines Paris - PSL (École nationale supérieure des mines de Paris) - PSL - Université Paris Sciences et Lettres - I3 - Institut interdisciplinaire de l’innovation - CNRS - Centre National de la Recherche Scientifique)

Abstract

This article analyses long-term dynamic hedging strategies relying on term structure models of commodity prices and proposes a new way to calibrate the models which takes into account the error associated with the hedge ratios. Different strategies, with maturities up to seven years, are tested on the American crude oil futures market. The study considers three recent and efficient models respectively with one, two, and three factors. The continuity between the models makes it possible to compare their performances which are judged on the basis of the errors associated with a delta hedge. The strategies are also tested for their sensitivity to the maturities of the positions and to the frequency of the portfolio rollover. We found that our method gives the best of two seemingly incompatible worlds: the higher liquidity of short-term futures contracts for the hedge portfolios, together with markedly improved performances. Moreover, even if it is more complex, the three-factor model is by far, the best.

Suggested Citation

  • Delphine Lautier & Alain Galli, 2010. "Dynamic hedging strategies: an application to the crude oil market," Post-Print halshs-00640802, HAL.
    • Handle: RePEc:hal:journl:halshs-00640802
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00640802v1
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    References listed on IDEAS

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    Cited by:

    1. Benjamin Cheng & Christina Sklibosios Nikitopoulos & Erik Schlögl, 2019. "Interest rate risk in long‐dated commodity options positions: To hedge or not to hedge?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(1), pages 109-127, January.
    2. James S. Doran & Ehud I. Ronn, 2021. "Hedging Long-Dated Oil Futures and Options Using Short-Dated Securities—Revisiting Metallgesellschaft," JRFM, MDPI, vol. 14(8), pages 1-10, August.

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