Thesis or dissertation
Date of this Version
The launch of liquified natural gas futures in May of 2017 on a major exchange follows a dramatic increase in global demand for the energy source. The profit of firms that produce LNG, known as transformers, is driven by the spread between the price of natural gas and LNG. With the launch of LNG futures, transformers now have the ability to hedge their exposure to this spread, similar to oil refiners hedging the crack spread. This paper proposes three hedging strategies transformers can utilize to limit their exposure to natural gas and LNG price movements. Using second-order lower partial moments (LPM2) as a measure for hedging effectiveness, this paper will show that transformers who do not hedge their exposure to the spread perform better than those who employ any of the proposed strategies, a result driven in part by 2017 market conditions.
natural gas, LNG, commodity hedging
Hofstadter, C. L. (2018). "The Cool Spread: Hedging Natural Gas - LNG Price Movements," Joseph Wharton Scholars. Available at https://repository.upenn.edu/joseph_wharton_scholars/57
Date Posted: 23 October 2018