Hedging strategies within the aluminum market An analysis of forecast adjusted strategies with the persepctive of a Norwegian entity

Abstract

This thesis examines the effectiveness of static and selective hedging strategies in the aluminum market. Additionally, the thesis highlights the outcome from the perspective of a Norwegian entity, particularly focusing on the impact of the USD/NOK exchange rate. By applying forecast adjustments to static strategies such as MVHR and Naive HR, we develop selective strategies. We then analyze these to determine whether they provide any additional benefits. Employing a quantitative analytical framework, the study uses regression analysis to calculate the HR and adjust the MVHR and NHR based on three forecast types: analyst predictions, naive forecasts, and seasonal and trend variation forecasts. This methodology is thoroughly tested for data validity, including tests for stationarity, cointegration, and normal distribution. The research reveals that hedging strategies adjusting for analytics market forecasts offer the best risk-adjusted returns, as indicated by higher Sharpe ratios. Additionally, the research presents that selective strategies does not necessarily improve hedging effectiveness, when compared to static strategies. We also find that the results differ when considering the impact of currency exchange rates. This variation is notable in terms of both the Sharpe ratio and hedging effectiveness, underscoring the significant role currency fluctuations play in determining the optimal approach for hedging. This thesis contributes to the field by presenting a novel approach to hedging strategy formulation, incorporating forecast-based adjustments and currency fluctuations. It provides empirical evidence on the effectiveness of these adjusted strategies in managing market risks. This research underscores the importance of incorporating dynamic forecast adjusted strategies, particularly for entities in the aluminum market operating across different currencies. It presents a comprehensive view of how tailored hedging approaches can effectively manage the inherent risks in commodity trading. The research offers valuable insights for both theoretical understanding and practical application in risk management.