Hedging Price Risk When Payment Dates are Uncertain

Present study examines the efficiency of futures contracts in hedging unwanted price risk over highly volatile period i.e. June 2000 - December 2007 and January 2008 – June 2014, pre and post-financial crisis period, by using S&PC NXNIFTY, CNXIT and BANKNIFTY for near month futures contracts. The hedge ratios have been estimated by using five methods namely Ederingtons Model, ARMA-OLS, GARCH (p,q), EGARCH (p,q) and TGARCH (p,q). The study finds that hedging effectiveness increased during post crisis period for S&PC NXNIFTY and BANKNIFTY. However, for CNXIT hedging effectiveness was better during pre-crisis period than post crisis. The study also finds that time-invariant hedge ratio is more efficient than time-variant hedge ratio.

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Does Aversion to Price Risk Drive Migration? Evidence from Rural Ethiopia

American Journal of Agricultural Economics ◽

10.1111/ajae.12199 ◽

2021 ◽

Cited By ~ 1

Author(s):

Yu Na Lee

Keyword(s):

Price Risk ◽

Rural Ethiopia

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Construction material supply risk management using Asian option contracts: the case of a pipeline project

Engineering Construction & Architectural Management ◽

10.1108/ecam-02-2019-0102 ◽

2020 ◽

Vol 27 (10) ◽

pp. 3395-3414

Author(s):

Mohammad Vahdatmanesh ◽

Afshin Firouzi

Keyword(s):

Risk Management ◽

Scenario Analysis ◽

Price Risk ◽

Asian Option ◽

Steel Pipeline ◽

Content Type ◽

Price Fluctuations ◽

Option Contracts ◽

Pipeline Project ◽

Total Price

PurposeSteel price uncertainty exposes pipeline projects that are inherently capital intensive to the risk of cost overruns. The current study proposes a hedging methodology for tackling steel pipeline price risk by deploying Asian option contracts that address the shortcomings of current risk mitigation strategies.Design/methodology/approachA stepwise methodology is introduced, which uses a closed-form formula as an Asian option valuation method for calculating this total expenditure. The scenario analysis of three price trends examines whether or not the approach is beneficial to users. The sensitivity analysis then has been conducted using the financial option Greeks to assess the effects of changes in volatility in the total price of the option contracts. The total price of the Asian options was then compared with those of the European and American options.FindingsThe results demonstrate that the Asian option expenditure was about 1.87% of the total cost of the case study project. The scenario analysis revealed that, except for when the price followed a continuous downward pattern, the use of this type of financial instrument is a practical approach for steel pipeline price risk management.Practical implicationsThis approach is founded on a well-established financial options theory and elucidates how pipeline project participants can deploy Asian option contracts to safeguard against steel price fluctuations in practice.Originality/valueAlthough the literature exists about the theory and application of financial derivative instruments for risk management in other sectors, their application to the construction industry is infrequent. In the proposed methodology, all participants involved in fixed price pipeline projects readily surmount the risk of exposure to material price fluctuations.

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