. Ethanol refiners are exposed to short-term price-risk separately on their corn and ethanol inventories and forward commitments. Corn is a mature market, while ethanol is a recently new and developing market. We identify differences in the issues faced by hedgers in these two markets and generalise our conclusions to other developing and mature markets. Understanding the hedging characteristics of corn and ethanol is of importance not only to corn farmers and ethanol users (mainly gasoline blenders), but to all players involved in the refining industry. Given that the industry is heavily influenced by policy (this understanding is also of critical importance to national and international policy formation.
This paper addresses issues affecting mature and developing markets by studying the hedging characteristics of the two most important commodities at the food-fuel intersection. Rather than examine the linkages between these commodities we rely on the evidence that the commodities are distinct2 and draw from this that the two commodities must be separately hedged in the short term. The study examines the period between 2016and 2018, including the summers of 2016and 2018when markets were particularly turbulent for different reasons.3 Important differences between regularly cited data sets for spot ethanol prices are identified; we explain these differences in terms of data collection methodology and demonstrate the substantial effect of these differences on empirical results. Optimal futures hedge ratios and hedge effectiveness for the spot/futures pairs of corn and ethanol are investigated using a variety of models, hedge horizons and out-of-sample periods. All hedge strategies are tested for effectiveness using both a variance reduction metric and a value-at-risk reduction metric. Anomolous hedge performance in the latter part of our sample period is identified and evaluated, and this effect is explained in terms of weather-related inventory shocks and (to a lesser extent) biases in estimating optimal futures hedge ratios.
omestic market is an internal market of a single country wherein trading is based on the demand and supply of goods, services and securities of that country. Foreign exchange markets, commonly termed as “Forex markets” allow an entity to trade in other countries utilizing the currencies of the countries. Imagine an American tourist traveling to India, he or she will have to pay for the food in a local stall in Indian rupees not in US dollars, for which the tourist must convert US dollars to Indian rupees for the services rendered in India. If this was not possible, would the tourist be able to travel to India! This is a simple example of currency conversion. Companies, organizations, even countries trade in currencies to meet their requirements, making forex markets the largest financial market in the world. The entities gain based on the movement of prices either upward or downward. In cases, when buying takes places, and the prices are moving upward, profits are made. This is termed as go LONG. In cases, when selling is taking place and the price is moving downwards, profits are made again. This is termed as go SHORT.
