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Risk Return Trade-offs from Hedging Oil Price Risk in Ecuador

This paper analyses methods to reduce the price risk of Ecuadorian oil exports through hedging in the oil futures market. I simulate ex ante cross hedges over the 1991–96 period and find that in every case, ex ante hedging would have been effective in reducing risk. I provide quantitative estimates of the return/risk trade-offs from hedging Ecuadorian oil and find that for risk minimising short hedges, a 1 per cent reduction in risk would have cost a reduction in return of 0.65 per cent. In sum, I find that oil futures hedging offers Ecuador significant risk-reduction potential.

Key Words: Risk-return trade-off • hedging • oil prices

Journal of Emerging Market Finance, Vol. 4, No. 1, 27-41 (2005)
DOI: 10.1177/097265270400400102


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