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So I have Time Series data for Gas Spot and Futures Prices (first 6 front quarters and first 3 front years) from 2009-2019 and I want to evaluate the performance of a 3- year static hedge vs. 3- year Rolling hedge. Say I have a yearly need of 100’000 barrels of oil. So my plan was to pick a point in 2009 say 1.1 and then for the static hedge I would buy the futures for delivery at 1.1 2010, 1.1 2011 and 1.1 2012. Then on the 1.1 2010 I would sell the futures, buy the 100‘000 barrels on the spot market and buy the futures with delivery 1.1. 2013. Next year at 1.1. 2011 I would buy the 100‘000 barrels at the spot, sell the futures and another futures with delivery 1.1.2014 and so on.

For the rolling the hedge forward strategy I would buy 3*100‘000 front year so if I buy at 1.1. 2009 the delivery would be 1.1.2010. On the date of delivery I would buy 100‘000 at the spot sell all the futures contracts and buy another 3*100‘000 futures with 1.1.2011 delivery and so on.

Finally I would then compare the costs of this strategy. My questions are now is this methodlogy correct? And how could I determine the fraction of futures to be purchased?

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  • $\begingroup$ If you're looking at hedging for a gas producer (consumer), then the best hedge is to sell (buy) the futures for each expiry in line with you're expected production (consumption). $\endgroup$ – will Apr 7 at 5:52
  • $\begingroup$ Well thats not always possible or the best option due to liquidity reasons f.e. i am trying to compare the methods. $\endgroup$ – macro123 Apr 7 at 8:15
  • $\begingroup$ True, but I would say that of there is a spread that does move (ie natgas HJ) then it will be actively trade, at least when a decent number of people have exposure to it. To me, the larger risk is the basis between the gas you have and the gas you hedge with, especially with something like gas where the prices are so localised. $\endgroup$ – will Apr 7 at 19:43

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