Publication Type

PhD Dissertation

Version

publishedVersion

Publication Date

4-2024

Abstract

Traditional hedging strategies usually center around a single product, commonly involving companies hedging against the price of their endproducts or essential production materials. At present, traditional hedgingstrategies are no longer sufficient to address the production and management requirements of physical enterprises. There is a need to develop hedgingstrategies aligning with the significant changes in both domestic andinternational markets.

The thesis presents a new profit hedging model based on product manufacturing processes within the industry chain. This method involves hedging production profits by buying (selling) end products and selling(buying) raw materials according to the proportional relationships in the production process on the futures market. Specifically, this study validates the efficacy of the proposed futures market profit hedging model fromboththeoretical and practical standpoints.

At the theoretical level, the thesis innovatively integrates futures price factors into the model’s mechanism, based on the classic Cournot model. Inthis process, this study leveraged Bayesian methodology to determine the future price of the commodity through a combination of spot price and futures price. By modifying the original price generation approach, the model is thereby innovated. Subsequently, this study derived an optimal productionarrangement for the Cournot model, considering futures market prices on aninnovative model. Analyzing the optimal production formula found that companies considering futures market profits can better organize their production to gain a competitive edge.

On a practical level, efforts were made on two dimensions. First, the study employed the classic statistical regression method to test if hot-rolledcoil products can be hedged using futures market profits. The findings showthat both pure statistical regression and a profit model rooted in actual production processes align with the concept of mean reversion. This implies that hedging hot-rolled coil varieties using futures market profits is entirelyviable. This study also constructs two sets of hedging strategies and compares the performance of single-commodity hedging strategies with those based onthe market profit from hot-rolled coil futures in each set. Backtesting withhistorical data, it reveals that hedging strategies based on market profits fromhot-rolled futures demonstrate higher opening rates, increased returns oninvestment (ROI), and lower volatility, surpassing traditional single-commodity hedging strategies in various aspects.

This study further outlines the risk points associated with the hedgingstrategy involving futures market profits within the industry chain andsuggests risk management solutions. The thesis summarizes three types of risks—strategic risk, operational risk, and fundamental risk—and provides corresponding countermeasures.

Keywords

Hot-rolled Coil Industry Chain, Futures Hedging, Cournot, Equilibrium, Risk Management

Degree Awarded

Doctor of Business Administration (Accounting and Finance)

Discipline

Accounting | Finance and Financial Management

Supervisor(s)

ZHANG, Liandong

First Page

1

Last Page

121

Publisher

Singapore Management University

City or Country

Singapore

Copyright Owner and License

Author

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