Korean Energy Economic Review ISSN:1599-7057(Print) 에너지경제연구

This study analyzes the usefulness of selective hedging strategy based on the moving- averages in order to deal with natural gas price risks compared to the conventional strategies of 1:1 and OLS hedges. For this purpose, it simulates the procurement cost flows based on the hedging scenarios by hedging periods from 3 to 12 weeks, and compares the means and variances of the procurement cost flows. The sample data include the spot prices of U.S. Henry Hub natural gas and the corresponding futures prices traded in the NYMEX. Both daily spot and futures series are converted to monthly averages. The sample period covers from January 2017 to October 2021 (245 weeks). According to the empirical results, all four hedging strategies were superior to no hedge alternative. In terms of procurement cost reduction, the descending order is as follows: 1:1 hedge, selective hedge(1:1), OLS hedge, and selective hedge(OLS). Variance reductions were revealed in descending order as follows: selective hedge(1:1), 1:1 hedge, selective hedge(OLS), and OLS hedge. Therefore, one could identify that the selective hedge scheme outperforms the strategies of 1:1 hedge or OLS hedge in terms of hedging effectiveness. This implies that selective hedge could reduce procurement costs and stabilize the cost flows.