Hedging price risk when no direct hedge vehicle exists: the case of silicon

Bahram Adrangi, University of Portland
Arjun Chatrath, University of Portland
Rohan A. Christie-David
Mariia Guk, University of Portland
Gaurav Malik, University of Portland

Applied Economics Letters, 2014, Volume 21, Issue 4, 276-279.

© 2014 Taylor & Francis

Linked version is the final published version.

Abstract

Silicon has wide applications in the electronic, ferrous foundry and chemical industries but does not possess a well-developed forward or futures market. Here we investigate potential candidates to cross-hedge silicon’s price risk. Our results show that a proxy for a newly introduced Chicago Mercantile Exchange (CME) ferrous contract, iron and steel scrap, explains close to 60% of the variation in silicon price changes. Estimated Generalized Least Squares (EGLS) estimations of hedge ratios are shown to produce more consistent hedge-effectiveness over OLS counterparts. Thus, it appears that the ferrous contract could fulfil this role.