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How firms should hedge: An extension
Author(s) -
Korn Olaf
Publication year - 2010
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.20446
Subject(s) - bivariate analysis , hedge , extension (predicate logic) , derivative (finance) , economics , variance (accounting) , econometrics , stochastic game , mathematical economics , conditional expectation , multivariate normal distribution , actuarial science , mathematics , financial economics , multivariate statistics , computer science , statistics , accounting , biology , programming language , ecology
This note studies a firm's optimal hedging strategy with tailor‐made exotic derivatives under both price risk and quantity risk. It extends the analysis of Brown G. W. and Toft K.‐B. (2002) by relaxing the assumption of a bivariate normal distribution. The optimal payoff function of a derivative contract is characterized in terms of the expectation and variance of the quantity, conditional on the price. This main result is illustrated by different examples, stressing the importance of the dependence structure between price risk and quantity risk for the choice of appropriate hedging instruments. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:834–845, 2010
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