Stack and roll hedge

blackjack21
Good Student
Posts: 20
Joined: Thu May 03, 2012 9:56 pm

Stack and roll hedge

Postby blackjack21 » Wed May 09, 2012 7:21 pm

Schweser's notes suggest that transfer from a strip to stack hedge might be beneficial to an oil producer but this begs that the Metallgesellshaft's scenario be revisited. When an oil producer would stack hedge wouldn't he be exposed to basis risk just like the case of MG ? :shock:

"To form a stack hedge, the oil producer would enter into a one-month futures contract equaling the total value of the year's promised deliveries. At the end of the first month, the producer rolls into the next one-month contract, and so forth, each month setting the total amt of contract equal to the remaining promised deliveries...." does the word "remaining" comes because the value of the contract is now equal to total value of the remaining year "...This strategy of continually rolling into the next near term contract is referred to as stack and roll".

"distant futures on commodity have wider bid-ask spreads and hence large transac costs"
What is the reln btwn transac costs and wider bid-ask spread? :roll:

"If fwd curve is steep, the oil producer would then enter into a stacked hedge with a large near term contract. WHY???? :roll: :roll: :roll: :roll: :roll: :roll: "

"If fwd curve flattens he would lock in a relatively cheap near term price compared to the more expensive futures using a strip strategy."

I couldn't follow the wind. Kindly help me understand this statement. this might be a silly quesn to ask :oops:

P.S. If the explanation includes use of excel sheets kindly support them with an explanation.

Thank you

Tags:

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: Stack and roll hedge

Postby content.pristine » Thu May 10, 2012 2:24 pm

Hi Blackjack,

We have an article on our blog about the stack and roll hedge.
Check it out at: http://www.edupristine.com/blog/stack-and-roll-hedge/

Let me know if you still have any more queries. 8-)

bks.gtb
Good Student
Posts: 13
Joined: Sat Apr 07, 2012 7:43 pm

Re: Stack and roll hedge

Postby bks.gtb » Fri May 11, 2012 4:26 am

Hi,

Not able to view the diagram as mentioned in the link. Can you please share the diagram with quadrants as referred to in the link?

Thanks.

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: Stack and roll hedge

Postby content.pristine » Fri May 11, 2012 7:22 pm

Hi Everyone,

That article is currently being updated online. However, it may not be live til Monday or Wednesday. In the meanwhile, if you drop your email id, I can personally send you the diagram.

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: Stack and roll hedge

Postby content.pristine » Fri May 11, 2012 8:18 pm

Hi Everyone,

The post has been updated with the diagram. You can check it out at the same link

8-)


Return to “CFA Level I”



Disclaimer

Global Association of Risk Professionals, Inc. (GARP®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to EduPristine nor is GARP® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP® and Global Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright violation of any kind please send a mail to abuse@edupristine.com and we will rectify it.