This paper shows pricing and hedging efficiency of a three factor stochastic mean reversion Gaussian
model of commodity prices using oil and copper futures and forward contracts. The model is estimated
using NYMEX WTI (light sweet crude oil) and LME Copper futures prices and is shown to fit the data
well. Furthermore, it shows how to hedge based on a three-factor model and confirms that using three
different futures contracts to hedge long-term contract outperforms the traditional parallel hedge based on
a single futures position by time series data and simulation. It also finds that the three factor model
outperforms its two-factor version in replication of actual term structures and that stochastic mean
reversion models outperform constant mean reversion models in Out of Sample hedges.
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