102,931 research outputs found
Effective Basemetal Hedging: The Optimal Hedge Ratio and Hedging Horizon
This study investigates optimal hedge ratios in all base metal markets. Using recent hedging computation techniques, we find that 1) the short-run optimal hedging ratio is increasing in hedging horizon, 2) that the long-term horizon limit to the optimal hedging ratio is not converging to one but is slightly higher for most of these markets, and 3) that hedging effectiveness is also increasing in hedging horizon. When hedging with futures in these markets, one should hedge long-term at about 6 to 8 weeks with a slightly greater than one hedge ratio. These results are of interest to many purchasing departments and other commodity hedgers
Quantile Hedging in a Semi-Static Market with Model Uncertainty
With model uncertainty characterized by a convex, possibly non-dominated set
of probability measures, the agent minimizes the cost of hedging a path
dependent contingent claim with given expected success ratio, in a
discrete-time, semi-static market of stocks and options. Based on duality
results which link quantile hedging to a randomized composite hypothesis test,
an arbitrage-free discretization of the market is proposed as an approximation.
The discretized market has a dominating measure, which guarantees the existence
of the optimal hedging strategy and helps numerical calculation of the quantile
hedging price. As the discretization becomes finer, the approximate quantile
hedging price converges and the hedging strategy is asymptotically optimal in
the original market.Comment: Final version. To appear in the Mathematical Methods of Operations
Research. Keywords: Quantile hedging, expected success ratio, model
uncertainty, semi-static hedging, Neyman-Pearson Lemm
Hedging Effectiveness under Conditions of Asymmetry
We examine whether hedging effectiveness is affected by asymmetry in the
return distribution by applying tail specific metrics to compare the hedging
effectiveness of short and long hedgers using crude oil futures contracts. The
metrics used include Lower Partial Moments (LPM), Value at Risk (VaR) and
Conditional Value at Risk (CVAR). Comparisons are applied to a number of
hedging strategies including OLS and both Symmetric and Asymmetric GARCH
models. Our findings show that asymmetry reduces in-sample hedging performance
and that there are significant differences in hedging performance between short
and long hedgers. Thus, tail specific performance metrics should be applied in
evaluating hedging effectiveness. We also find that the Ordinary Least Squares
(OLS) model provides consistently good performance across different measures of
hedging effectiveness and estimation methods irrespective of the
characteristics of the underlying distribution
OPTIMAL HEDGING STRATEGIES FOR THE U.S. CATTLE FEEDER
Multiproduct optimal hedging for simulated cattle feeding is compared to alternative hedging strategies using weekly price data for 1983-95. Out-of-sample means and variances of hedged feeding margins using estimated hedge ratios for four commodities suggest that there is no consistent domination pattern among the alternative strategies, leaving the hedging decision up to the agent's degree of risk aversion. However, all hedging strategies significantly reduce the feeding margin's means and variances compared to no hedging, with variance reduction always exceeding 50%. Hedging results appear quite sensitive to the data set and its size.cattle feeding, hedge ratios, hedging strategies, multiproduct hedging, optimal hedging, Marketing,
Hedging strategies and minimal variance portfolios for European and exotic options in a Levy market
This paper presents hedging strategies for European and exotic options in a
Levy market. By applying Taylor's Theorem, dynamic hedging portfolios are con-
structed under different market assumptions, such as the existence of power
jump assets or moment swaps. In the case of European options or baskets of
European options, static hedging is implemented. It is shown that perfect
hedging can be achieved. Delta and gamma hedging strategies are extended to
higher moment hedging by investing in other traded derivatives depending on the
same underlying asset. This development is of practical importance as such
other derivatives might be readily available. Moment swaps or power jump assets
are not typically liquidly traded. It is shown how minimal variance portfolios
can be used to hedge the higher order terms in a Taylor expansion of the
pricing function, investing only in a risk-free bank account, the underlying
asset and potentially variance swaps. The numerical algorithms and performance
of the hedging strategies are presented, showing the practical utility of the
derived results.Comment: 32 pages, 6 figure
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