Operational Hedge and Financial Hedge: Evidence from Oil Producers

Stuart School of Business research presentation by: You Lu, Stuart Ph.D. student; Associate Professor of Finance Yiwei Fang; and Associate Professor of Finance Solomon Kang

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Operational Hedge and Financial Hedge: Evidence from Oil Producers

Abstract:

This paper investigates the effects of operational hedging on firm value and commodity price risks. It explores a novel type of operational hedging—the natural operational hedging positions between the upstream crude oil producers and the downstream oil consumers. Using hand-collected data of 272 unique oil producing firms, we find that operational hedging is a substitute for financial hedging. Operational hedging is sufficiently effective in reducing firms’ exposure to oil price risk. Consistent with hedging theory, we also find that operational hedging adds to firm value measured by Tobin’s Q.

 

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