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How firms should hedge: An extension

✍ Scribed by Olaf Korn

Publisher
John Wiley and Sons
Year
2009
Tongue
English
Weight
109 KB
Volume
30
Category
Article
ISSN
0270-7314

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✦ Synopsis

Abstract

This note studies a firm's optimal hedging strategy with tailor‐made exotic derivatives under both price risk and quantity risk. It extends the analysis of Brown G. W. and Toft K.‐B. (2002) by relaxing the assumption of a bivariate normal distribution. The optimal payoff function of a derivative contract is characterized in terms of the expectation and variance of the quantity, conditional on the price. This main result is illustrated by different examples, stressing the importance of the dependence structure between price risk and quantity risk for the choice of appropriate hedging instruments. Β© 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:834–845, 2010

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