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Traditional approach to hedging crude oil refining margin (crack spread) adopts a fixed 3:2:1 ratio between the futures positions of crude oil, gasoline, and heating oil. However, hedging the latter in arbitrary proportions might be more effective under some conditions. The paper constructs optimal hedging strategies for both scenarios during the periods of relatively stable and volatile oil prices observed in recent years. Minimization of downside risk (LPM2) and variance are used as alternative hedging objectives. The joint distribution of spot and futures price shocks is modeled using a kernel copula method. The hedging performance of the constructed strategies is compared using hedging effectiveness, expected profit, and expected shortfall. Results show that allowing for arbitrary proportions in sizes of futures positions generally achieves better hedging performance. The advantage becomes particularly important during periods characterized by a high volatility of the cross-dependence between the prices of individual commodities. In addition, using ??????2 as a hedging criterion can help hedgers to better track downside risk as well as lead to higher expected profit and lower expected shortfall.


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