An optimal strategy for hedging with short-term futures contracts

An optimal strategy for hedging with short-term futures contracts

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Article ID: iaor20041420
Country: United Kingdom
Volume: 13
Issue: 2
Start Page Number: 331
End Page Number: 344
Publication Date: Jun 2003
Journal: Mathematical Finance
Authors: ,
Keywords: investment
Abstract:

The search for an optimal strategy to reduce the running risk in hedging a long-term supply commitment with short-dated futures contracts leads to a class of intrinsic optimization problems. We give an explicit analytic solution for this optimization problem if the market price of the commodity is based on a simple Gaussian model, thereby replacing previously used incomplete approximations to the optimal strategy.

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