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 agentÃâ'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 Ãâ"diluting"Ãâ 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 InfoPaper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 5156.
Date of creation: 01 Jul 1996
Date of revision:
Publication status: Published in Journal of Agricultural and Resource Economics, July 1996, vol. 21, pp. 39-55
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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
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Other versions of this item:
- Lence, Sergio H., 1996. "Relaxing The Assumptions Of Minimum-Variance Hedging," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 21(01), July.
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