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Hedging the portfolio of raw materials and the commodity under the mark-to-market risk

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  • Fu, Junhui
  • Zhang, Wei-Guo
  • Yao, Zheng
  • Zhang, Xili

Abstract

This paper considers the hedging problem of a portfolio composed of raw materials and a commodity. A new theoretical model is presented to manage the risk exposure of the portfolio under the mark-to-market risk. Moreover, we employ the Lemke algorithm to obtain the optimal hedging strategy. We use a case of the soybean oil manufacturer from May 2008 to June 2011 to illustrate the proposed model and algorithm. The results show that the mark-to-market risk must be taken into account when devising the hedging strategies.

Suggested Citation

  • Fu, Junhui & Zhang, Wei-Guo & Yao, Zheng & Zhang, Xili, 2012. "Hedging the portfolio of raw materials and the commodity under the mark-to-market risk," Economic Modelling, Elsevier, vol. 29(4), pages 1070-1075.
    • Handle: RePEc:eee:ecmode:v:29:y:2012:i:4:p:1070-1075
    DOI: 10.1016/j.econmod.2012.03.025
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    Cited by:

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    2. Narayan, Paresh Kumar & Sharma, Susan Sunila, 2016. "Intraday return predictability, portfolio maximisation, and hedging," Emerging Markets Review, Elsevier, vol. 28(C), pages 105-116.

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