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Regional Limitations on the Hedging Effectiveness of Natural Gas Futures

This paper examines the extent to which limitations in the transportation system for the natural gas market in the United States narrows the effectiveness of the NYMEX natural gas future contract as a hedging instrument and why a second contract with a different delivery point was approved during 1995. We find that the NYMEX contract is an effective hedging instrument for gas sold into pipelines for consumption in southern, eastern and midwestern states, but does, not provide an effective hedge for gas sold for Rocky Mountain and West Coast states.

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Energy Specializations: Energy Investment and Finance – Trading Strategies and Financial Instruments; Natural Gas – Markets and Prices

JEL Codes:
G13 - Contingent Pricing; Futures Pricing; option pricing
L13 - Oligopoly and Other Imperfect Markets

Keywords: Natural gas futures, NYMEX, gas prices, hedging, market integration

DOI: 10.5547/ISSN0195-6574-EJ-Vol16-No3-5

Published in Volume16, Number 3 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.