Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/178532 
Year of Publication: 
2011
Citation: 
[Journal:] Journal of Risk and Financial Management [ISSN:] 1911-8074 [Volume:] 4 [Issue:] 1 [Publisher:] MDPI [Place:] Basel [Year:] 2012 [Pages:] 133-161
Publisher: 
MDPI, Basel
Abstract: 
This paper considers the multiperiod hedging decision in a framework of mean-reverting spot prices and unbiased futures markets. The task is to determine the optimal hedging path, i.e., the sequence of positions in futures contracts with the objective of minimizing the variance of an uncertain future cash flow. The model is used to illustrate both hedging using a matchedmaturity futures contract and hedging by rolling over a series of nearby futures contracts. In each case, the paper derives the conditions under which a single period (myopic) strategy would be optimal as opposed to a dynamic multiperiod strategy. The results suggest that greater the market power of the hedging entity, closer the optimal strategy is to a myopic hedge. The paper also highlights the difference in the optimal hedging path when hedging is based on matched-maturity as opposed to nearby contracts.
Subjects: 
Multiperiod Hedging
Futures, Mean Reversion
JEL: 
G32
G13
Persistent Identifier of the first edition: 
Creative Commons License: 
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Document Type: 
Article

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