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Multiperiod hedging with futures contracts
Author(s) -
Low Aaron,
Muthuswamy Jayaram,
Sakar Sudipto,
Terry Eric
Publication year - 2002
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.10035
Subject(s) - futures contract , economics , maturity (psychological) , econometrics , basis (linear algebra) , commodity , ex ante , mathematical economics , basis risk , asset (computer security) , financial economics , mathematics , computer science , capital asset pricing model , finance , psychology , developmental psychology , geometry , computer security , macroeconomics
The hedging problem is examined where futures prices obey the cost‐of‐carry model. Theresultant hedging model explicitly incorporates maturity effects in the futures basis. Formulas for the optimalstatic and dynamic hedges are derived. Although these formulas are developed for the case of direct hedging, theframework used is sufficiently flexible so that these formulas can be applied to many cross‐hedgingsituations. The performance of the model is compared with that of several other models for two hedgingscenarios: one involving a financial asset and the other involving a commodity. In both cases, significantmaturity effects were found in the first and second moments of the futures basis. Our hedging formulasoutperformed other hedging strategies on an ex‐ante basis. © 2002 Wiley Periodicals, Inc. Jrl FutMark 22:1179–1203, 2002