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Cash Ethanol Cross-Hedging Opportunities

Author

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  • Franken, Jason R.V.
  • Parcell, Joseph L.
Abstract
Increased use of alternative fuels and low commodity prices have contributed to the recent expansion of the ethanol industry. As with any competitive industry, there exists some level of output price risk in the form of volatility. Yet, no actively traded ethanol futures market exists to transfer output price risk to. This study reports estimated minimum variance cross-hedge ratios between Michigan spot cash ethanol and the New York Mercantile Exchange (NYMEX) unleaded gasoline futures for 1-, 4-, 8-, 16-, and 24-week hedging periods. The research yields two results. First, the appropriate quantity of ethanol to hedge with one 42,000 NYMEX unleaded gasoline futures contract for each respective hedging period is realized. Second, the magnitude of the quantities of ethanol required to implement an effective minimum variance cross-hedge ratio is recognized as a possible deterrent to ethanol buyers and sellers from entering into a cross-hedge.

Suggested Citation

  • Franken, Jason R.V. & Parcell, Joseph L., 2002. "Cash Ethanol Cross-Hedging Opportunities," Working Papers 26035, University of Missouri Columbia, Department of Agricultural Economics.
    • Handle: RePEc:ags:umcowp:26035
    DOI: 10.22004/ag.econ.26035
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    References listed on IDEAS

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    Cited by:

    1. Chang, Chia-Lin & Chen, Li-Hsueh & Hammoudeh, Shawkat & McAleer, Michael, 2012. "Asymmetric adjustments in the ethanol and grains markets," Energy Economics, Elsevier, vol. 34(6), pages 1990-2002.
    2. Hammoudeh, S.M. & Sarafrazi, S. & Chang, C-L. & McAleer, M.J., 2011. "The Dynamics of Energy-Grain Prices with Open Interest," Econometric Institute Research Papers EI 2011-19, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    3. Brinker, Adam J. & Parcell, Joseph L. & Dhuyvetter, Kevin C., 2007. "Cross-Hedging Distillers Dried Grains: Exploring Corn and Soybean Meal Futures Contracts," 2007 Conference, April 16-17, 2007, Chicago, Illinois 37567, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    4. Gustavo Carvalho Santos & Flavio Barboza & Antônio Cláudio Paschoarelli Veiga & Mateus Ferreira Silva, 2021. "Forecasting Brazilian Ethanol Spot Prices Using LSTM," Energies, MDPI, vol. 14(23), pages 1-15, November.
    5. Sari, Ramazan & Hammoudeh, Shawkat & Chang, Chia-Lin & McAleer, Michael, 2012. "Causality between market liquidity and depth for energy and grains," Energy Economics, Elsevier, vol. 34(5), pages 1683-1692.
    6. Białkowski, Jędrzej & Bohl, Martin T. & Perera, Devmali, 2023. "Commodity futures hedge ratios: A meta-analysis," Journal of Commodity Markets, Elsevier, vol. 30(C).
    7. Dahlgran, Roger A., 2007. "Inventory and Transformation Hedging Effectiveness in Corn Crushing," 2007 Conference, April 16-17, 2007, Chicago, Illinois 37557, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    8. Bolandifar, Ehsan & Chen, Zhong, 2020. "Hedging through index-based price contracts in commodity-based supply chains," Omega, Elsevier, vol. 90(C).
    9. Zhao, Jieyuan & Goodwin, Barry K., 2012. "Dynamic Cross-Hedge Ratios: An Application of Copula Models," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124610, Agricultural and Applied Economics Association.
    10. Parcell, Joseph L. & Boessen, Christian R. & Altman, Ira J. & Sanders, Dwight R., 2008. "Cross-Hedging Fishmeal: Exploring Corn and Soybean Meal Futures Contracts," 2008 Annual Meeting, February 2-6, 2008, Dallas, Texas 6763, Southern Agricultural Economics Association.
    11. Jędrzej Białkowski & Martin T. Bohl & Devmali Perera, 2022. "Commodity Futures Hedge Ratios: A Meta-Analysis," Working Papers in Economics 22/12, University of Canterbury, Department of Economics and Finance.
    12. Chris Brooks & Ryan J. Davies & Sang Soo Kim, 2005. "Cross Hedging with Single Stock Futures," ICMA Centre Discussion Papers in Finance icma-dp2004-15, Henley Business School, University of Reading.
    13. Spencer, Simon & Bredin, Don & Conlon, Thomas, 2018. "Energy and agricultural commodities revealed through hedging characteristics: Evidence from developing and mature markets," Journal of Commodity Markets, Elsevier, vol. 9(C), pages 1-20.
    14. Shylaja P & Anver Sadath C, 2016. "Futures Trading: Informational Content of Open Interest and Trading Volume on Futures Price," Asian Journal of Economics and Empirical Research, Asian Online Journal Publishing Group, vol. 3(2), pages 156-162.
    15. Galinato, Suzette P. & Young, Douglas L. & Frear, Craig S. & Yoder, Jonathan K., 2011. "Will Washington Provide Its Own Crop Feedstocks for Biofuels?," Western Economics Forum, Western Agricultural Economics Association, vol. 10(1), pages 1-11.
    16. Franken, Jason R.V. & Irwin, Scott H. & Garcia, Philip, 2021. "Biodiesel hedging under binding renewable fuel standard mandates," Energy Economics, Elsevier, vol. 96(C).

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