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Hedging in Futures and Options Markets with Basis Risk

✍ Scribed by Olivier Mahul

Publisher
John Wiley and Sons
Year
2002
Tongue
English
Weight
116 KB
Volume
22
Category
Article
ISSN
0270-7314

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✦ Synopsis

Abstract

This paper analyzes the hedging decisions for firms facing price and basis risk. Two conditions assumed in
most models on optimal hedging are relaxed. Hence, (i) the spot price is not necessarily linear in
both the settlement price and the basis risk and (ii) futures contracts and options on futures at
different strike prices are available. The design of the first‐best hedging instrument is first derived
and then it is used to examine the optimal hedging strategy in futures and options markets. The role of options
as useful hedging tools is highlighted from the shape of the first‐best solution. Β© 2002 John Wiley
& Sons, Inc. Jrl Fut Mark 22:59–72, 2002

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