J. Risk Financial Manag. 2011, 4(1), 133-161; doi:10.3390/jrfm4010133
Article

Multiperiod Hedging using Futures: Mean Reversion and the Optimal Hedging Path

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Published: 31 December 2011
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
Abstract: This paper considers the multiperiod hedging decision in a framework of mean-reverting spot prices and unbiased futures markets. The task is to determine the optimal hedging path, i.e., the sequence of positions in futures contracts with the objective of minimizing the variance of an uncertain future cash flow. The model is used to illustrate both hedging using a matchedmaturity futures contract and hedging by rolling over a series of nearby futures contracts. In each case, the paper derives the conditions under which a single period (myopic) strategy would be optimal as opposed to a dynamic multiperiod strategy. The results suggest that greater the market power of the hedging entity, closer the optimal strategy is to a myopic hedge. The paper also highlights the difference in the optimal hedging path when hedging is based on matched-maturity as opposed to nearby contracts.
Keywords: Multiperiod hedging; futures; mean reversion
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MDPI and ACS Style

Rao, V.K. Multiperiod Hedging using Futures: Mean Reversion and the Optimal Hedging Path. J. Risk Financial Manag. 2011, 4, 133-161.

AMA Style

Rao VK. Multiperiod Hedging using Futures: Mean Reversion and the Optimal Hedging Path. Journal of Risk and Financial Management. 2011; 4(1):133-161.

Chicago/Turabian Style

Rao, Vadhindran K. 2011. "Multiperiod Hedging using Futures: Mean Reversion and the Optimal Hedging Path." J. Risk Financial Manag. 4, no. 1: 133-161.

J. Risk Financial Manag. EISSN 1911-8074 Published by MDPI AG, Basel, Switzerland RSS E-Mail Table of Contents Alert