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Price risk management by using dynamic hedging based on advanced Black–Scholes model

Author

Listed:
  • Peili Lu

    (FieldsInvest Asset Management Co., Ltd., WITHUB Venture Park, No. 333, Hongqiao Road, Xuhui District, Shanghai, P. R. China)

  • Jiaqi Shen

    (FieldsInvest Asset Management Co., Ltd., WITHUB Venture Park, No. 333, Hongqiao Road, Xuhui District, Shanghai, P. R. China)

  • Liheng Zhao

    (FieldsInvest Asset Management Co., Ltd., WITHUB Venture Park, No. 333, Hongqiao Road, Xuhui District, Shanghai, P. R. China)

  • Haoyang Qin

    (FieldsInvest Asset Management Co., Ltd., WITHUB Venture Park, No. 333, Hongqiao Road, Xuhui District, Shanghai, P. R. China)

  • Xunzhi Liu

    (FieldsInvest Asset Management Co., Ltd., WITHUB Venture Park, No. 333, Hongqiao Road, Xuhui District, Shanghai, P. R. China)

  • Zhongxing Ye

    (#x2020;School of Mathematical Science, Jiao Tong University, Shanghai 200240, P. R. China)

Abstract

Price Risk Management plays an important role in Commodity trading and corporate purchasing or Sales plan. Futures are used to hedge the price risk which is linear, while options are used for the nonlinear one. This paper proposes an evaluation method of dynamic hedging strategy for corporate hedging commodity price risk based on advanced Black–Scholes Model. By using the inverse replication method, we get the dynamic hedging strategy which uses futures to replicate options. Finally, we apply the dynamic hedging strategy for corporate purchases and sales to either lower purchase cost or maintain the sales price.

Suggested Citation

  • Peili Lu & Jiaqi Shen & Liheng Zhao & Haoyang Qin & Xunzhi Liu & Zhongxing Ye, 2020. "Price risk management by using dynamic hedging based on advanced Black–Scholes model," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 7(01), pages 1-14, March.
    • Handle: RePEc:wsi:ijfexx:v:07:y:2020:i:01:n:s2424786320500115
    DOI: 10.1142/S2424786320500115
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    References listed on IDEAS

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    4. Acharya, Viral V. & Lochstoer, Lars A. & Ramadorai, Tarun, 2013. "Limits to arbitrage and hedging: Evidence from commodity markets," Journal of Financial Economics, Elsevier, vol. 109(2), pages 441-465.
    5. Garman, Mark B. & Kohlhagen, Steven W., 1983. "Foreign currency option values," Journal of International Money and Finance, Elsevier, vol. 2(3), pages 231-237, December.
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