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Futures Cross-Hedging with a Stationary Basis

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  • Ankirchner, Stefan
  • Dimitroff, Georgi
  • Heyne, Gregor
  • Pigorsch, Christian

Abstract

When managing risk, frequently only imperfect hedging instruments are at hand. We show how to optimally cross-hedge risk when the spread between the hedging instrument and the risk is stationary. For linear risk positions we derive explicit formulas for the hedge error, and for nonlinear positions we show how to obtain numerically efficient estimates. Finally, we demonstrate that even in cases with no clear-cut decision concerning the stationarity of the spread, it is better to allow for mean reversion of the spread rather than to neglect it.

Suggested Citation

  • Ankirchner, Stefan & Dimitroff, Georgi & Heyne, Gregor & Pigorsch, Christian, 2012. "Futures Cross-Hedging with a Stationary Basis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(6), pages 1361-1395, December.
    • Handle: RePEc:cup:jfinqa:v:47:y:2012:i:06:p:1361-1395_00
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    References listed on IDEAS

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    Cited by:

    1. Zainudin, Ahmad Danial & Mohamad, Azhar, 2021. "Cross hedging with stock index futures," The Quarterly Review of Economics and Finance, Elsevier, vol. 82(C), pages 128-144.
    2. Mahan Tahvildari, 2021. "Forward indifference valuation and hedging of basis risk under partial information," Papers 2101.00251, arXiv.org.
    3. Vadhindran K. Rao, 2011. "Multiperiod Hedging using Futures: Mean Reversion and the Optimal Hedging Path," JRFM, MDPI, vol. 4(1), pages 1-29, December.
    4. Ankirchner, Stefan & Schneider, Judith C. & Schweizer, Nikolaus, 2014. "Cross-hedging minimum return guarantees: Basis and liquidity risks," Journal of Economic Dynamics and Control, Elsevier, vol. 41(C), pages 93-109.
    5. Carla Mereu & Robert Stelzer, 2015. "A BSDE arising in an exponential utility maximization problem in a pure jump market model," Papers 1508.07561, arXiv.org, revised Jan 2016.
    6. Zura Kakushadze & Juan Andrés Serur, 2018. "151 Trading Strategies," Springer Books, Springer, number 978-3-030-02792-6, September.

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