Hedging price risk when payment dates are uncertain
AbstractThis paper studies the hedging of price risk when payment dates are uncertain, a problem that frequently occurs in practice. It derives and establishes the variance minimizing dynamic hedging strategy, using forward contracts with different times to maturity. The resulting strategy fully hedges the expected price exposure for each possible payment date and is, therefore, easy to implement. An empirical study compares the performance of the variance minimizing strategy with heuristic alternatives, based on data from the crude oil market and the foreign exchange market. Our analysis shows that the variance minimizing strategy clearly outperforms the alternatives for the crude oil market. For the foreign exchange market, a simple static hedging strategy is sufficient. --
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Bibliographic InfoPaper provided by University of Cologne, Centre for Financial Research (CFR) in its series CFR Working Papers with number 07-14.
Date of creation: 2009
Date of revision:
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More information through EDIRC
risk management; hedging; forwards; uncertainty of time;
Find related papers by JEL classification:
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
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