Topic: Hedging Pressure and Commodity Option Prices

Speaker: Ing-Haw Cheng, Associate Professor of Finance, Rotman School of Management, University of Toronto

Date: December 15, 2021 (Wednesday)

Time: 10:00am-11:30am

Location: 4-101

Language: English

 

Abstract:

A new measure of hedging pressure in commodity options markets—commercial hedgers’ net short option exposure—predicts option returns and changes in the slope of implied volatility curves. Puts are more expensive, and calls are cheaper, when values of option hedging pressure are greater. This pattern is consistent with commercial traders’ natural hedging motives. A strategy that provides liquidity to hedgers earns an average excess return of 6.4% per month before transaction costs and consideration of margin requirements. Overall, our results confirm the existence of hedging premiums, demand effects, and limits to arbitrage in commodity option markets.

  

About the Speaker:

Ing-Haw Cheng is an Associate Professor of Finance at the University of Toronto, Rotman School of Management. He researches how beliefs and incentives affect capital markets and the economy. Recent work includes studies of volatility and commodity derivatives markets, the impact of Covid-19 and the 2008 Great Financial Crisis on markets, and new and emerging topics in economics and finance. Papers, data, and more at https://inghawcheng.github.io/.