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Managing Energy Price Risk using Futures Contracts: A Comparative Analysis

Abstract:
This paper carries out a comparative analysis of managing energy risk through futures hedging, for energy market participants across a broad dataset that encompasses the largest and most actively traded energy products. Uniquely, we carry out a hedge comparison using a variety of risk measures including Variance, Value at risk (VaR), and Expected Shortfall as well as a utility based performance metric for two different investor horizons; weekly and monthly. We find that hedging is effective across the spectrum of risk measures we employ. We also find significant differences in both the hedging strategies and the hedging effectiveness of different energy assets. Better performance is found for West Texas Intermediate Oil and Heating Oil while the poorest performer in hedging terms is Natural Gas.

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Energy Specializations: Energy Modeling – Forecasting and Market Analysis; Energy Investment and Finance – Corporate Strategy; Energy Investment and Finance – Trading Strategies and Financial Instruments; Energy and the Economy – Energy Shocks and Business Cycles; Natural Gas – Markets and Prices; Petroleum – Markets and Prices for Crude Oil and Products

JEL Codes:
D4 -
D92 - Intertemporal Firm Choice: Investment, Capacity, and Financing
G13 - Contingent Pricing; Futures Pricing; option pricing
F44 - International Business Cycles
L13 - Oligopoly and Other Imperfect Markets

Keywords: Energy, Futures, Hedging, Risk Management, Value at Risk

DOI: 10.5547/01956574.38.3.jhan

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Published in Volume 38, Number 3 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.