Hedging Commodities Using Derivatives

This paper examines hedging positions of 46 U.S. oil and gas companies from 2017 to 2019 and evaluates the effect of hedging on firms value. Oil and gas companies hedge their production in order to reduce their exposure to unexpected commodity price decrease. Theories of hedging imply that firms which hedge their production should have higher market value. To test this a detailed information about firms hedging activities, oil and gas reserves and firms stock prices was collected. Sensitivity analysis of hedging exposure to stock prices and analysis of hedging impact on firms value have been conducted. Empirical analysis has shown that hedging decreases stock price sensitivity to commodity prices fluctuations. Moreover, firm value analysis has verified that firms which hedge higher percentage of their oil production tend to have lower market value.