This paper examines a simple basis risk model based on correlated geometric Brownian motions. We apply quadratic criteria to minimize basis risk and hedge in an optimal manner. Initially, we derive the Föllmer–Schweizer decomposition for a European c...
On the condition that both futures and options exist in the markets for hedging, this paper examines the optimal hedging strategy under price risk and background risk. Compared with the previous research, which has studied options hedging against bas...
We study a discrete time hedging and pricing problem in a market with the liquidity risk. We consider a discrete version of the constant elasticity of variance (CEV) model by applying Leland’s discrete time replication scheme. The pricing equat...
In the dynamic sphere of financial markets, hedge funds have emerged as a critical force, navigating through volatility with advanced risk management techniques yet grappling with the challenges posed by illiquid assets. This study aims to transcend...
As variable renewable energy (VRE) penetration increases, renewable generators face revenue risk from electricity prices, generation volumes, and their time-varying co-movement, commonly referred to as shape risk. This study evaluates whether the Qua...
We investigate the impact of model uncertainty on hedging longevity risk with index-based derivatives and assessing longevity basis risk, which arises from the mismatch between the hedging instruments and the portfolio being hedged. We apply the biva...
Hedging rules for water supply reservoir operations provide guidelines for balancing the consequences of competing water allocations. When inflow forecast uncertainty is addressed, hedging acts as insurances for offsetting the negative influence of w...
The uncertainty of forecasted runoffs brings risks of water shortages to water users in the intake area of long-distance water transfer projects, and the uncertainty of spot market prices may cause them to buy water at high prices. In order to hedge...
Dynamic canal-system scheduling faces the fundamental challenge of determining the optimal reduction in the current period’s water allocation to reserve sufficient water for remaining periods, thereby hedging against potentially greater future...
This article aims to examine the hedging effect of green bonds in the US market, the European market, and the Chinese market on carbon price risk in the European Union Emission Trading System (EU ETS) from 2021 to 2023. By using daily datasets extrac...
This paper applies a two-tier model based on fuel hedging (model 1) and the testing of the impact of commodity risk on airline capacity forecasting, which is based on a system dynamics framework (model 2). Model 1 provides a comprehensive examination...
The agricultural futures market plays an extremely important role in price discovery, hedging risks, integrating agricultural markets and promoting agricultural economic growth. China is the largest apple producer and consumer in the world. In 2017,...
This study proposes a structured product (SP) for hedging defined contribution pension fund members against capital market risk. Using Monte Carlo simulations on three different guaranteed returns to test the investment strategy of the SP against a b...
The widespread adoption of electricity market trading platforms has enhanced the standardization and transparency of trading processes. As markets become more liberalized, regulatory policies are phasing out protective electricity pricing mechanisms,...
The increased uptake of variable renewable energy sources has increased electricity price volatility in many energy pool markets, providing an opportunity for storage systems to profit through energy arbitrage. Comparison between the cost or value of...
Hedging downside risk before substantial price corrections is vital for risk management and long-only active equity manager performance. This study proposes a novel methodology for crafting timing signals to hedge sectors’ downside risk. These...
Raw material price volatility, freight rates, and foreign exchange all pose significant uncertainty for lithium-ion battery manufacturers, jeopardising procurement planning and financial stability. In this paper, we formulate a discrete Conditional V...
In the turbulent landscape of financial markets, Bitcoin has emerged as a significant focus for investors due to its highly volatile returns. However, the risks and uncertainties associated with it necessitate effective hedging strategies. This paper...
The paper examines the valuation and hedging of life insurance obligations in the presence of mortality risk using the local risk-minimizing hedging approach. Roughly speaking, it is assumed that the lifetime of policyholders in an insurance portfoli...
We introduce the industrial portfolio of a wind farm of a hypothetical company and its valuation consistent with the financial market. Next, we propose a static risk management policy originating from hedging against volumetric risk due to drops in w...
This paper studies the effect of variance swap in hedging volatility risk under the mean-variance criterion. We consider two mean-variance portfolio selection problems under Heston’s stochastic volatility model. In the first problem, the financ...
This paper focuses on the valuation and hedging of gas storage facilities, using a spot-based valuation framework coupled with a financial hedging strategy implemented with futures contracts. The contributions of this paper are two-fold. Firstly, we...
This article investigates the effectiveness of TAIEX (Taiwan Stock Exchange) futures, Taiwan 50 futures, and nonfinance nonelectronics subindex (NFNE) futures for cross hedging the price risk of stock sector indices traded on the Taiwan stock exchang...
This study investigates whether FinTech thematic assets achieve dynamic variance reduction for regional ESG market risk under clean-energy equity stress regimes, using daily data from March 2019 to August 2024 across five S&P ESG LargeMidCap mark...
The literature on derivative pricing in illiquid markets has mostly focused on computing optimal hedging controls, but empirical microstructure studies show that large order flow generates persistent and predictable price effects. Therefore, these co...
Using a hedging strategy to stabilize fuel price is very important for airline companies in order to reduce the cost of their main business. In this paper, we construct models for managing the risk of the hedging strategy. First, we use conditional v...
This study examines the volatility and hedging effectiveness of commodities, specifically gold and oil, on the Indian stock market, focusing on both aggregate and sectoral indices. Data have been collected from 1 January 2021 to 31 December 2024 to c...
Over the last years, farmers have been increasingly exposed to income risk due to the volatility of the commodities prices. Among others, hedging in futures markets (i.e., financial markets) represents an available strategy for producers to cope with...
In this paper, we conduct a fast calibration in the jump-diffusion model to capture the Bitcoin price dynamics, as well as the behavior of some components affecting the price itself, such as the risk of pitfalls and its ambiguous effect on the evolut...
The joint uncertainties of wholesale price and end-user demand quantity often poses huge pricing challenges to energy retailers. However, the literature lacks analysis of such uncertainties’ impacts on retailer pricing behaviors and possible he...
Although the finance literature has devoted a lot of research into the development of advanced models for improving the pricing and hedging performance, there has been much less emphasis on approaches to measure dynamic hedging effectiveness. This ar...
Energy is considered as a commodity nowadays and continuous access along with price stability is of vital importance for every economic agent worldwide. The aim of the current review paper is to present in detail the two dominant hedging strategies r...
Despite the growing share of renewable energy sources, most of the world energy supply is still based on hydrocarbons and the vast majority of world transport is fuelled by oil products. Thus, the profitability of many companies may depend on the eff...
The carbon–financial nexus helps firms evaluate susceptibility to carbon risk more effectively. This is the first research article to model the short- and long-run co-integrating association between European financial markets, the CBOE oil pric...
We examine how firms manage their foreign exchange (FX) exposure using publicly reported data on FX exposure before and after hedging with corresponding hedging instruments. Based on calculated firm-, year-, and currency-specific hedge ratios, we fin...
The European Union (EU) has agreed to gradually include shipping in the EU emissions trading scheme (EU ETS), which makes shipping companies vulnerable to carbon price fluctuations. The aim of this paper is to investigate the effectiveness of carbon...
Insurers issuing segregated fund policies apply dynamic hedging to mitigate risks related to guarantees embedded in such policies. A typical industry practice consists of using fund mapping regressions to represent basis risk stemming from the imperf...
The use of financial derivatives to hedge economic risks presents several operational and financial reporting challenges to corporations. Special hedge accounting treatment is stringent and complex; different accounting treatments may be used for sim...
Extreme shocks, including climate change, economic sanctions, geopolitical conflicts, etc., are significant and complex issues currently confronting the global world. From the US–China perspective, this paper employs the DCC-DAGM model to inves...
This paper proposes a model-free approach to hedging and pricing in the presence of market imperfections such as market incompleteness and frictions. The generality of this framework allows us to conduct an in-depth theoretical analysis of hedging st...
This paper reassessed the hedging properties of four major safe-haven currencies (US dollar, Swiss franc, euro, yen) in international stock portfolios covering most representative world macroeconomic areas. The main contribution to the existing liter...
The present paper tests the use of an agricultural futures minimum tracking error portfolio to replicate the price of the Mexican Hass avocado (a non-commodity). The motivation is that this portfolio could be used to balance the basis risk that the a...
This paper assesses the hedge effectiveness of an index-based longevity swap and a longevity cap for a life annuity portfolio. Although longevity swaps are a natural instrument for hedging longevity risk, derivatives with non-linear pay-offs, such as...
In this paper we propose a maximum entropy estimator for the asymptotic distribution of the hedging error for options. Perfect replication of financial derivatives is not possible, due to market incompleteness and discrete-time hedging. We derive the...
4 December 2019
Poor air quality has a negative impact on social life and economic production activities. Using financial derivatives to hedge risks is one of the important methods. Air quality index (AQI) options are designed to help enterprises cope with the opera...
The performance of hedge funds is of interest to investors looking for ways of generating value over passive strategies, particularly in bad times. This study used the Hedge Index database with over 9500 hedge funds to analyse, in depth, the performa...
This study examines the associations among product market competition, commodity hedging, and income smoothing in the metals industry. Using a text-based measure of competition intensity, we find that firms facing stronger competitive pressures are m...
This paper extends the extreme downside correlation (EDC) and extreme downside hedge (EDH) methodology to model the interdependence in the sensitivity of assets to the downside risk of other financial assets under severe firm-level and market conditi...
This paper tested the use of the surplus efficient frontier (a minimum tracking error portfolio selection method) to select the optimal hedging portfolio that replicates the best Mexican #4 lemon price in a t + 1 and t + 4 week hedging scenario. Usin...
Volatile non-ferrous metal prices create a sustainability challenge for electrical equipment manufacturers because input cost pressure can affect resource adjustment decisions and operational continuity. This study examines the association between me...
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