Optimum futures hedges with jump risk and stochastic basis

Article Abstract:

The lognormal diffusion process is the most popularly used asset price process in the continuous-time financial theory. Discontinuity in the asset price as well as jump components in the market portfolio and exchange rates have been noted. An intertemporal futures hedging model is developed with mean-reverting basis, time-decay volatility and price and basis jumps. The derived intertemporal optimum hedge ratio could account for a more substantial set of realistic hedging behaviors than the conventional method.

Usage, Futures market, Futures markets, Lognormal distribution

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Hedging long-term commodity risk

Article Abstract:

The problems of hedging long-term commodity positions, which often arise when the maturity of actively trade futures contracts on the commodity is limited to a few months, are highlighted. A one-factor term structure model of futures convenience yields is used to construct a hedging strategy that minimizes both spot-price and rollover risk.

Forecasts, trends, outlooks, Forecasts and trends, Market trend/market analysis, Commodity markets

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Optimum futures hedge in the presence of clustered supply and demand shocks, stochastic basis, and firm's costs of hedging

Article Abstract:

Concave risk-return tradeoff dictates a hedge ratio to be substantially less than the traditional risk-minimization one. Empirical validation confirms that actual industry hedge ratios vary significantly lower than what risk-minimization dictates.

Commodity options

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