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We examine whether the hedging effectiveness of crude oil futures is affected by asymmetry in the return distribution by applying tail-specific metrics to compare the hedging effectiveness of both short and long hedgers. The hedging effectiveness metrics we use are based on lower partial moments (LPM), value at risk (VaR) and conditional value at risk (CVaR). Comparisons are applied to a number of hedging strategies including ordinary least square (OLS), and both symmetric and asymmetric GARCH models. We find that OLS provides consistently better performance across different measures of hedging effectiveness as compared with GARCH models, irrespective of the characteristics of the underlying distribution.

A futures contract may rely upon physical delivery or cash settlement to liquidate open positions at the maturity date. Contract settlement specification has direct impacts on the behavior of the futures price, leading to different effects of liquidity risk on futures hedging. This chapter compares such effects under alternative settlement specifications with a simple analytical model of daily price change. Numerical simulation results demonstrate that capital constraint reduces hedging effectiveness and tends to produce a lower optimal hedge ratio. As the futures contract proceeds toward the maturity date, hedgers will take larger hedge position in order to achieve better hedging effectiveness. Finally, optimal hedge ratios are higher (resp. lower) under cash settlement for the bivariate normal (resp. lognormal) assumptions, whereas hedging effectiveness is almost always greater under cash settlement.

Midwest Independent Transmission System Operator, Inc. (MISO) is a nonprofit regional transmission organization (RTO) that oversees electricity production and transmission across 13 states and 1 Canadian province. MISO also operates an electronic exchange for buying and selling electricity for each of its five regional hubs.

MISO oversees two types of markets. The forward market, which is referred to as the day-ahead (DA) market, allows market participants to place demand bids and supply offers on electricity to be delivered at a specified hour the following day. The equilibrium price, known as the locational marginal price (LMP), is determined by MISO after receiving sale offers and purchase bids from market participants. MISO also coordinates a spot market, which is known as the real-time (RT) market. Traders in the RT market must submit bids and offers by 30minutes prior to the hour for which the trade will be executed. After receiving purchase and sale offers for a given hour in the RT market, MISO then determines the LMP for that particular hour.

The existence of the DA and RT markets allows producers and retailers to hedge against the large fluctuations that are common in electricity prices. Hedge ratios on the MISO exchange are estimated using various techniques. No hedge ratio technique examined consistently outperforms the unhedged portfolio in terms of variance reduction. Consequently, none of the hedge ratio methods in this study meet the general interpretation of FASB guidelines for a highly effective hedge.

This study provides evidence on the importance of operational hedges in foreign-exchange risk management, an issue that has been largely ignored in the literature. One possible reason for the absence of empirical evidence in the literature may be related to the difficulty in devising the appropriate measures of a firm's ability to construct operating hedges. We utilize measures of the structure of an MNC's foreign subsidiary network as proxies of the firm's ability to devise operational hedges and examine their relationship to exposure coefficients computed prior to and during the 1997–1998 Asian currency crisis. Our results show that the mean exposure during the Asian crisis period was significantly higher than the pre-crisis period. In addition, the mean of the absolute change in the exposure of MNCs that only operate in the Asian crisis region was significantly higher than that of MNCs without operations in the crisis region. We find a strong relationship between our proxies for ability to construct operating hedges and exchange-rate exposure measures both prior to the crisis and during the crisis. An even stronger association between exposure and measures of the MNC network structure is found for the sub-sample of MNCs that have some operations in the Asian crisis region. Similar results are obtained when the relationship is examined separately for “net importers” (MNCs with positive exposures) and “net exporters” (MNCs with negative exposures). Overall, our results are consistent with the notion that operational hedges significantly reduce a firm's exposure to foreign-exchange risk.

Using a GED-GARCH model to estimate monthly data from January 1990 to February 2022, we test whether gold acts as a hedge or safe haven asset in 10 countries. With a downturn of the stock market, gold can be viewed as a hedge and safe haven asset in the G7 countries. In the case of inflation, gold acts as a hedge and safe haven asset in the United States, United Kingdom, Canada, China, and Indonesia. For currency depreciation, oil price shock, economic policy uncertainty, and US volatility spillover, evidence finds that gold acts as a hedge and safe haven for all countries.

This study employs a new time series representation of persistence in conditional mean and variance to test for the existence of the long memory property in the currency futures market. Empirical results indicate that there exists a fractional exponent in the differencing process for foreign currency futures prices. The series of returns for these currencies displays long-term positive dependence. A hedging strategy for long memory in volatility is also discussed in this article to help the investors hedge for the exchange rate risk by using currency futures.

The purpose of this paper is to determine the best way to hedge currency risk using futures contracts. Various techniques of hedging currency risk are compared, and a new method is proposed. This paper also documents the duration and the expiration effects on the optimal hedge ratio. The main finding of this paper is that, of the techniques examined, the hedge ratio derived by Vishwanath (1993) performs the best. This paper also finds that as the duration of the hedge increases, the hedge ratio increases. For one week and two weeks duration hedges, as the time left to futures contract expiration increases, the hedge ratio increases and there is linear relationship. The results are not as pronounced for four and six-week duration hedges.

This chapter focuses on the common occurrence of wholesale electricity prices that fall below the cost of production. This “negative pricing” in effect represents payment to high-volume consumers for taking excess power off the grid, thus relieving overload. Occurrences of negative pricing have been observed since the wholesale electricity markets have been operating, and occur during periods of low demand, while generators are being kept in reserve for rapid engagement when demand increases (it is expensive and time-consuming to shut down generators and then restart them, so they are often kept in “spooling mode”). In such situations power production may temporarily exceed demand, potentially overloading the system. When the federal government began subsidizing the construction of wind generation projects, with regulations in place requiring transmission grids to accept all of the electricity produced by the wind generators, negative pricing became more frequent.

This chapter develops a no-arbitrage, futures equilibrium cost-of-carry model to demonstrate that the existence of cointegration between spot and futures prices in the New York Mercantile Exchange (NYMEX) crude oil market depends crucially on the time-series properties of the underlying model. In marked contrast to previous studies, the futures equilibrium model utilizes information contained in both the quality delivery option and convenience yield as a timing delivery option in the NYMEX contract. Econometric tests of the speculative efficiency hypothesis (also termed the “unbiasedness hypothesis”) are developed and common tests of this hypothesis examined. The empirical results overwhelming support the hypotheses that the NYMEX future price is an unbiased predictor of future spot prices and that no-arbitrage opportunities are available. The results also demonstrate why common tests of the speculative efficiency hypothesis and simple arbitrage models often reject one or both of these hypotheses.