Characterizing the Hedging Policies of Commodity Price-Sensitive Corporations

31 Pages Posted: 15 Jul 2017 Last revised: 1 Aug 2018

See all articles by Raphaël Boroumand

Raphaël Boroumand

PSB Paris School of Business

Stephane Goutte

University Paris-Saclay, UVSQ, CEMOTEV, UVSQ.

Ehud I. Ronn

University of Texas at Austin - Department of Finance

Date Written: July 15, 2017

Abstract

Many corporations in the developed world face price and quantity uncertainty in commodities for which there are traded assets -- futures and options contracts -- which permit these corporations to hedge the risk to which they are exposed. Finance research has demonstrated frictions in capital markets are equivalent to risk-averse decision-making: Accordingly, decision-makers may make optimal decisions based on a trade-off between risk and return.

Theory indicates the optimal hedging program hinges on the amount of exposure the corporation wishes to hedge: As risk aversion increases the company's optimal hedge proceeds from no-hedging, to acquiring options, then to replacing options with futures contracts. Using data from the CFTC as well as gold companies, this paper provides an empirical test of whether corporations' hedge ratios are consistent with such optimal management of risk exposure using futures and/or options.

Keywords: Optimal Hedge Ratios

JEL Classification: G11, G13, G31

Suggested Citation

Boroumand, Raphaël and Goutte, Stephane and Ronn, Ehud I., Characterizing the Hedging Policies of Commodity Price-Sensitive Corporations (July 15, 2017). Available at SSRN: https://ssrn.com/abstract=3003324 or http://dx.doi.org/10.2139/ssrn.3003324

Raphaël Boroumand

PSB Paris School of Business ( email )

59 rue Nationale
Paris, 75013
France

Stephane Goutte

University Paris-Saclay, UVSQ, CEMOTEV, UVSQ. ( email )

47 Boulevard Vauban
Guyancourt, 78280
France

HOME PAGE: http://https://sites.google.com/site/mathgoutte/

Ehud I. Ronn (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Graduate School of Business
Austin, TX 78712
United States
512-471-5853 (Phone)
512-471-5073 (Fax)

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