Relaxing The Assumptions Of Minimum-Variance Hedging
AbstractThe most important minimum-variance hedging ration assumptions are (a) that production is deterministic and (b) that all of the agentÂ’'s wealth is invested in the cash position. Stochastic production greatly reduces optimal hedge ratios. An alternative investment greatly reduces opportunity costs of not hedging by Â“"diluting"Â” the cash position. Stochastic production and/or alternative investments render the costs associated with hedging relatively more important, yielding almost negligible net benefits of hedging. Hence, hedging costs typically dismiss in hedging models for being seemingly negligible are important determinants of hedging behavior.
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Bibliographic InfoArticle provided by Western Agricultural Economics Association in its journal Journal of Agricultural and Resource Economics.
Volume (Year): 21 (1996)
Issue (Month): 01 (July)
Other versions of this item:
- Lence, Sergio H., 1996. "Relaxing the Assumptions of Minimum-Variance Hedging," Staff General Research Papers 5156, Iowa State University, Department of Economics.
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