Berclays Capital: Corn and Ethanol Prices

3 Pages Posted: 23 Jun 2009

See all articles by Phillip E. Pfeifer

Phillip E. Pfeifer

University of Virginia - Darden School of Business

Todd Dreyer

affiliation not provided to SSRN

Abstract

A summer intern must explain to his boss the negative correlation between the prices of corn and ethanol for 2006 and the first half of 2007. The negative correlation called into question the use of traditional hedges against corn prices to directly hedge against the volatility in ethanol prices. This case comes with a spreadsheet: UVA-QA-0716X, "Berclays Capital: Corn and Ethanol Prices."

Excerpt

UVA-QA-0716

Rev. Jun. 22, 2012

Berclays Capital: Corn and Ethanol Prices

Seth pulled off his headset after listening in on the phone call between his manager and someone with the chief financial officer's (CFO's) office at General Electric. Seth surmised that GE (which recently added ecomagination as a component of its longstanding Imagination at Work campaign) was considering either using or producing ethanol and wanted to know whether it would be possible to use corn prices as an effective way to hedge against the volatility in ethanol prices. Since ethanol was made from corn, it seemed reasonable that corn and ethanol prices would be closely related. If this was the case, hedges against corn prices (which Berclays was expert at structuring and implementing) might be used directly to hedge against volatility in ethanol prices.

Seth, a trading summer associate at Berclays Capital, volunteered to examine the historical relationship between corn and ethanol prices and report back quickly to his manager. This would be Seth's first opportunity to work directly with his manager, and he was anxious to impress. His manager commented:

We have the price data for corn going back to about forever, and since ethanol has recently started trading we have some good data there as well; why don't you get those numbers and run some correlations and whatever, and get back to me?

. . .

Keywords: correlation, regression, data analysis

Suggested Citation

Pfeifer, Phillip E. and Dreyer, Todd, Berclays Capital: Corn and Ethanol Prices. Darden Case No. UVA-QA-0716, Available at SSRN: https://ssrn.com/abstract=1423302

Phillip E. Pfeifer (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4803 (Phone)

HOME PAGE: http://www.darden.virginia.edu/faculty/Pfeifer.htm

Todd Dreyer

affiliation not provided to SSRN

No Address Available

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