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Journal of Risk and Financial Management is published by MDPI from Volume 6 Issue 1 (2013). Articles in this Issue were published by another publisher in Open Access under a CC-BY (or CC-BY-NC-ND) licence. Articles are hosted by MDPI on as a courtesy and upon agreement with Prof. Dr. Raymond A. K. Cox and Prof. Dr. Alan Wong.
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Multiperiod Hedging using Futures: Mean Reversion and the Optimal Hedging Path

College of Management, Metropolitan State University,13th St & Harmon Place Minneapolis, MN 55403, USA
J. Risk Financial Manag. 2011, 4(1), 133-161;
Published: 31 December 2011
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. View Full-Text
Keywords: Multiperiod hedging; futures; mean reversion Multiperiod hedging; futures; mean reversion
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Rao, V.K. Multiperiod Hedging using Futures: Mean Reversion and the Optimal Hedging Path. J. Risk Financial Manag. 2011, 4, 133-161.

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