This paper considers the optimal hedge ratio problem under estimation risk. Due to incomplete information, the decision‐maker evaluates the opportunity cost of hedging using exchange‐traded funds or ...notes (ETF/Ns). Using a backtesting procedure over the last 5 years and 13 different hedging instruments—both inverse‐equity ETFs and volatility ETNs—we quantify the proposed opportunity cost using different out‐of‐sample performance metrics. Given the greater accessibility of commission‐free brokers for small investors along with the popularity of ETF/Ns, our paper appeals to retail investors and provides guidance in terms of choosing the optimal hedge ratio under estimation risk.
Composite jet fuel cross-hedging Cao, Min; Conlon, Thomas
Journal of commodity markets,
June 2023, 2023-06-00, Volume:
30
Journal Article
Open access
Jet fuel prices are highly volatile and outside airlines’ control, incentivizing them to reduce earnings volatility through financial hedging. Due to limited direct hedging options, airlines often ...resort to cross-hedging of jet fuel requirements. In this paper, we propose a composite jet fuel cross-hedging approach, shown to provide substantial performance benefits relative to a traditional single instrument strategy. A mimicking portfolio approach, incorporating multiple hedging instruments, is found to provide additional hedging gains. Finally, we demonstrate that further hedging effectiveness is achieved by adding recently introduced jet fuel swap contracts to a hedge portfolio.
•A novel composite approach to jet fuel cross-hedging is developed.•Composite hedging outperforms single instrument cross-hedging.•Multiple hedging instruments shown to provide further performance gains.•Incorporating jet fuel swap contracts to a hedge portfolio adds to effectiveness.•Findings are relevant to airlines exposed to short-term jet fuel price volatility.
