The Futures Hedging Positions of Oil Crack Spread

• Main Authors: Li-Jen Yeh, 葉立仁
• Other Authors: Ming-Yueh Tarng
• Format: Others
• Language: zh-TW
• Published: 1999
• Online Access: http://ndltd.ncl.edu.tw/handle/71810343461181469563

博士 === 國立交通大學 === 經營管理研究所 === 87 === Abstract Organization of Petroleum Exporting Countries (OPEC) dominates the supply of the oil all over the world. This makes crude oil prices very sensitive to the political situations in the Middle East. Furthermore, since there is seasonal effect in the consumption of refined oil product mixes, the reaction of new information might not be immediate and efficient as that for the crude oil. Crack spread, a kind of commodity spread strategy, permits traders to take positions both on refining profit margins and refined product mixes. It is an important tool to energy complex hedgers and has become popular among sophisticated speculators. Much of the published works has focused on basis hedging, while theoretical analysis of spread hedging strategies has only received very limited attention. Although most textbooks only deal with one-to-one positions in spreading, more sophisticated approaches such as Shutz (1984) and Poitras (1989) have discussed some fixed-ratio spread strategies. As no convergence has been reached in spread hedge, no strong market linkage between related commodities in inter-commodity spread trading seems to exist. This research will explore the issue of low hedging effectiveness for traditional spreading under weak market-linkage environment. To explore the market linkage mechanism and crack spread hedging positions in oil futures trading, this paper extends the market linkage model (Garbade and Silber, 1983) using crack spread behaviors with tri-commodity hedging strategies. Using the concepts of gross refining cost and crack ratios, a trading-price market linkage model is developed to describe the behaviors of oil futures market linkage. Since trading prices of related futures are considered, our model is not only testable but can also be applied to observe the linked degree of related futures markets and the influential directions of tuning structures. Crack spread series is proved to provide a unit root-based approach to test market linkage hypothesis in a perfect market. Its first-order autoregressive coefficient can be employed to measure the degree of linkage. The cointegration test (Engle and Granger, 1987) helps to set up a kind of stable relationship. It is inferred theoretically that the increase in last-period crack spread should leads to an increase in contemporary crude oil futures prices and a simultaneous decrease in refined oil futures prices as well. The empirical results show that the influential directions due to variation in crack spread are consistent with our model. Additionally, it is confirmed that a stable relationship exists and some dynamic tuning structures are established. In order to improve the hedging effectiveness in spread trading, the behavior of crack spread series is also examined, tested and modeled. Confirmed stationarity for crack spread series is indispensable for building a stochastic spread hedging model. The crack spread series are assumed to follow random walk processes with approaching zero growth rates. After modeling the stochastic processes of concerned variables, we form a zero net investment portfolio to derive the characteristic equation of oil contingent claims. The minimum-variance crack spread hedge positions is then determined as a function of the values of crack spread. The empirical results, which is consistent to our theoretical model, show negative crack-spread hedge ratios. The convenience yields evidently exhibit mean-reverting behaviors. Besides, higher crack spread values always correspond to smaller absolute values of minimum-variance positions. This empirical analysis also shows that our stochastic crack spread hedging model outperforms the traditional one in terms of hedge effectiveness. The proper values are not equal to one, but locate in the range of -0.8~-0.9. It is suggested that the refiners should hold the crack spread portfolios according to our estimated hedge ratios to further ensure the production profit margins and reduce the variance of portfolio''s return.