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Futures hedging under mark‐to‐market risk
Author(s) -
Lien Donald,
Li Anlong
Publication year - 2003
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.10068
Subject(s) - futures contract , hedge , position (finance) , futures market , horizon , economics , financial economics , actuarial science , finance , mathematics , ecology , geometry , biology
This article introduces mark‐to‐market risk into the conventional futures hedging framework. Itis shown that a hedger concerned with maximum daily loss will considerably reduce his futures position when therisk is taken into account. In case of a moderate hedge horizon, the hedger will hedge approximately 80% ofhis spot position. The effect of mark‐to‐market risk decreases very slowly as the hedge horizon increases. If thehedger is concerned with average daily loss, the effect is minimal for a moderate hedge horizon. © 2003 WileyPeriodicals, Inc. Jrl Fut Mark 23:389–398, 2003
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