Dynamic Hedging of Real Wealth Risk
AbstractInternational and national investors are often exposed to real wealth risks, stemming from volatile asset prices and inflation uncertainty, making it difficult to stabilize consumption patterns. However, investors can enter futures markets to hedge against these risks. The paper develops a simple continuous-time dynamic model, where the evolution of asset price, price level and futures price and hence real wealth is stochastic. For a risk averse investor, optimal consumption and hedging strategy are derived and discussed. It is shown that hedging increases the investor's wellbeing in terms of intertemporal utility of consumption. --
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Bibliographic InfoPaper provided by Dresden University of Technology, Faculty of Business and Economics, Department of Economics in its series Dresden Discussion Paper Series in Economics with number 01/05.
Date of creation: 2005
Date of revision:
wealth; asset price; dynamic hedging; optimum consumption;
Find related papers by JEL classification:
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
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