Hedging with Commodity Futures

Table of Contents

• Introduction
• Hedging Strategies
• Risk Measures
• Standard Deviation and Its Variance
• VaR and CVaR
• Optimization of Hedging Objective Functions
• Minimum Variance Hedge
• Minimum (C)VaR Hedge
• Modeling Conditional Return Distribution
• Relationship between Futures and Spot Prices
• GARCH Models
• GARCH (1,1)
• Elliptical Distribution
• Multivariate GARCH
• Regime Switching Models
• Markov Chains
• Mixture of Distributions
• MRS-Model
• MRS-GARCH Model
• Implementation
• Description of the Data and Their Properties
• Testing for Normality
• Testing for ARCH Effects
• Testing for Stationarity
• Testing for Cointegration
• Parameter Estimation
• Estimation Results
• Hedge Ratios
• Hedging Effectiveness of the Hedging Strategy
• Conclusion and Future Outlook

Objectives and Key Themes

This master thesis aims to explore and evaluate different hedging strategies for managing the risk associated with commodity futures. The focus is on developing and comparing various dynamic hedging approaches based on different models for conditional return distributions. * **Risk Management with Commodity Futures:** The thesis examines the use of commodity futures for mitigating price risk in the context of portfolio management. * **Dynamic Hedging Strategies:** The work investigates and compares dynamic hedging strategies that adjust hedge ratios based on evolving market conditions. * **Modeling Conditional Return Distribution:** The study explores different models, including GARCH and regime-switching models, to capture the dynamics of commodity price movements. * **Hedging Effectiveness Evaluation:** The thesis evaluates the effectiveness of the proposed hedging strategies by comparing their performance against traditional static approaches. * **Empirical Analysis:** The study employs real-world data to illustrate the practical application and assess the effectiveness of the various hedging approaches.

Chapter Summaries

The first chapter provides an introduction to the topic of hedging with commodity futures, outlining the motivation for the research and presenting the overall structure of the thesis. Chapter 2 delves into the theoretical foundation of hedging strategies. It discusses risk measures, including standard deviation, VaR, and CVaR, and explores optimization techniques for hedging objective functions. Chapter 3 focuses on modeling the conditional return distribution of commodity prices. It explores the relationship between futures and spot prices and examines various models, including GARCH and regime-switching models, to capture the dynamics of price movements. Chapter 4 implements the developed hedging strategies using real-world data. It presents the data and its properties, discusses parameter estimation techniques, and analyzes the results of the hedging strategies.

Keywords

The primary keywords in this thesis include commodity futures, hedging strategies, risk management, dynamic hedging, GARCH models, regime-switching models, conditional return distribution, and hedging effectiveness. The research focuses on analyzing and comparing different hedging approaches based on various models to manage the risk associated with commodity price movements.