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Futures Hedging Under Disappointment Aversion

✍ Scribed by Donald Lien

Publisher
John Wiley and Sons
Year
2001
Tongue
English
Weight
111 KB
Volume
21
Category
Article
ISSN
0270-7314

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✦ Synopsis

Abstract

This article considers optimal futures hedging decisions when the hedger is disappointment‐averse
(Gul, 1991). When the futures contract is a perfect hedge instrument, a disappointment‐averse
hedger always holds a position closer to the full hedge than a nondisappointment‐averse hedger. In the
presence of basis risk, the optimal futures position is either a partial hedge or a full hedge. Neither Texas
hedge nor overhedge could be optimal. The effects of different degrees of disappointment aversion on futures
trading are also analyzed. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:1029–1042, 2001

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