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Multiperiod hedging with futures contracts

✍ Scribed by Aaron Low; Jayaram Muthuswamy; Sudipto Sakar; Eric Terry

Publisher: John Wiley and Sons
Year: 2002
Tongue: English
Weight: 179 KB
Volume: 22
Category: Article
ISSN: 0270-7314
DOI: 10.1002/fut.10035

No coin nor oath required. For personal study only.

✦ Synopsis

Abstract

The hedging problem is examined where futures prices obey the cost‐of‐carry model. The
resultant hedging model explicitly incorporates maturity effects in the futures basis. Formulas for the optimal
static and dynamic hedges are derived. Although these formulas are developed for the case of direct hedging, the
framework used is sufficiently flexible so that these formulas can be applied to many cross‐hedging
situations. The performance of the model is compared with that of several other models for two hedging
scenarios: one involving a financial asset and the other involving a commodity. In both cases, significant
maturity effects were found in the first and second moments of the futures basis. Our hedging formulas
outperformed other hedging strategies on an ex‐ante basis. © 2002 Wiley Periodicals, Inc. Jrl Fut
Mark 22:1179–1203, 2002

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