| Article ID: | iaor200973365 |
| Volume: | 21 |
| Issue: | 1 |
| Start Page Number: | 19 |
| End Page Number: | 26 |
| Publication Date: | Jan 2010 |
| Journal: | IMA Journal of Management Mathematics |
| Authors: | Clark Ephraim, Broll Udo, Lukas Elmar |
| Keywords: | hedging |
This paper uses the expected utility framework to examine the optimal hedging decision for commodities with mean-reverting price processes. The derived results show that when commodity prices follow a mean-reverting process, the optimal hedge ratio differs significantly from the classical results found under standard geometric Brownian motion. Hence, a failure to accommodate mean reversion when it exists can lead to systematic biases in hedging decisions.