he single period model, because of its simplicity and often plausible representa-T tion, is used to describe a wide range of economic and financial decision making. Those who advocate such an approach recognize that the world is truly multiperiod and approximately infinite, but find that a single period model is adequate under certain conditions. Either decisions in one period have little or no ef- fect on future periods or the interperiod dependencies are too complex to be captured in the modeling process. These two reasons are the ones most often cited, explicitly or implicitly, as justification for using a single period model.
Futures hedging is no exception. Most models proposed to explain hedging are all single period' [see, for example, Ederington (1979); Anderson and Danthine (1980); Howard and D'Antonio (1984, 1986); ; Black (1989); Hilliard and Jordon (1989)l. In addition, most empirical studies use a single period model even if the tests are conducted in a multiperiod setting. Some recent empirical hedging studies are those by , Black (1989), Gagnon et al. (1989), Gardner (1989), Lein (1989), .
However, hedgers frequently face a multiperiod situation in which a single period approach simply is not adequate. For example, consider an issuer of commercial paper who is paying off old and offering new commercial paper on a weekly basis. If the issuer finds it attractive to hedge interest costs on next week's issue, then all future weekly issues should be hedged, up to and including the final issue needed to fund the assets supported by the issue . This is because short term interest rates tend to follow a random walk and so higher (lower) interest cost next week will lead to higher (lower) interest costs in all the following weeks. Consequently, the hedge position taken today should take into consideration next week's issue as well as all future weekly issues.
Not all series being hedged are autocorrelated. Take, for example, the management of a stock portfolio with negligible cash inflows and outflows and no reinvestment. The series being hedged is the return on the stock portfolio which portrays little or no autocorrelation. Thus, a single period approach is appropriate. Of course, this does not rule out the possibility that the hedger will continuously hold Do not quote without permission. 'See Baesel and Grant (1982) for an example of a multiperiod futures trading model.