Valuation of commodity structures in co-integrated futures markets

In this paper, Dan Mahoney and Krzysztof Wolyniec show that in co-integrated (mean-reverting) futures markets, active dynamic hedging is required to realise the quadratic variation of the underlying spread process. Using static hedges/portfolios yields significantly different values from those available with dynamic strategies no matter what risk adjustment or penalty is adopted. The implications for pricing, hedging and optimal trading strategies in commodity markets are discussed

technical blocks

It is well known that several consumable commodity markets are related through equilibrium mechanisms: either through substitution or complementarity effects. For example, natural gas is used for production of electrical power in the US and UK to such an extent that power price formation is clearly influenced by the behaviour of natural gas prices.

Examples of other related commodities abound: crude oil and gasoline, heating oil and gasoline (substitution on the output side), natural gas and

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact or view our subscription options here:

You are currently unable to copy this content. Please contact to find out more.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to View our subscription options

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here