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The Traditional Hedging Model Revisited with a Nonobservable Convenience Yield
Author(s) -
Mellios Constantin,
Six Pierre
Publication year - 2011
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.2011.00312.x
Subject(s) - futures contract , convenience yield , hedge , economics , yield (engineering) , commodity , spot contract , value (mathematics) , financial economics , horizon , econometrics , microeconomics , mathematics , finance , statistics , ecology , materials science , metallurgy , biology , geometry
This article examines the hedging of constrained commodity positions with futures contracts. We extend the study of Adler and Detemple (1988a, 1988b) to include a partial information framework where the convenience yield is not observable. As a consequence, futures prices depend on investor's beliefs regarding the value of the convenience yield, and every component of the hedge is impacted by these beliefs. We achieve a decomposition of the demand that clarifies the impact on the optimal hedge of the beliefs, the spot price and the risk‐free rate as well as the hedging horizon.