A company has to hold an underlying asset for one year and it is looking to use Brent Crude futures to hedge against changes in the underlying asset's price.
1. Assuming there is no liquidity concerns in Brent Crude futures of all expiries, would it always make more sense to match the maturity of the futures and the underlying asset? (i.e. taking short position in one-year futures in this case). Or, for example if the 3-month futures show the highest R^2 between the futures' and underlying asset's historical price changes, are you willing to engage in a rolling hedge even when it means additional basis risk every time you rollover?
2. In running the regression of futures' and the underlying asset's price changes to estimate the optimal hedge ratio, is it better to use daily, weekly or monthly price? What is the most common industry practice and is there any justification for that?
Thank you so much in advance!
1. Assuming there is no liquidity concerns in Brent Crude futures of all expiries, would it always make more sense to match the maturity of the futures and the underlying asset? (i.e. taking short position in one-year futures in this case). Or, for example if the 3-month futures show the highest R^2 between the futures' and underlying asset's historical price changes, are you willing to engage in a rolling hedge even when it means additional basis risk every time you rollover?
2. In running the regression of futures' and the underlying asset's price changes to estimate the optimal hedge ratio, is it better to use daily, weekly or monthly price? What is the most common industry practice and is there any justification for that?
Thank you so much in advance!
