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Hedging multiple price and quantity exposures

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  • Carmelo Giaccotto
  • Shantaram P. Hegde
  • John B. McDermott

Abstract

We examined the general hedging problem faced by a global portfolio manager or a pure exporting multinational firm. Most hedging models assume that these economic agents hold only a single asset in the spot market and are exposed only to a single source of price–quantity uncertainty. Such models are less relevant to many financial and exporting firms that face multiple sources of risk. In this study, we developed a general hedging model that explicitly recognizes that these hedgers are faced with multiple price and quantity uncertainties. Our model takes advantage of the full correlation structure of changes in spot prices, quantities, and forward prices. We performed simulations of the hedging model for a firm with two pairs of price and quantity exposures to demonstrate potential gains in hedging efficiency and effectiveness. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:145–172, 2001

Suggested Citation

  • Carmelo Giaccotto & Shantaram P. Hegde & John B. McDermott, 2001. "Hedging multiple price and quantity exposures," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 21(2), pages 145-172, February.
    • Handle: RePEc:wly:jfutmk:v:21:y:2001:i:2:p:145-172
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    Cited by:

    1. Shotar, M.M. & El-Mefleh, M.A., 2009. "Economic Exposure To Exchange Rates In Jordan Companies: A Monthly Econometric Model Of The Rate Of Return Of Firms, 2004-2007," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 9(1).
    2. Jonathan Dark, 2004. "Long term hedging of the Australian All Ordinaries Index using a bivariate error correction FIGARCH model," Monash Econometrics and Business Statistics Working Papers 7/04, Monash University, Department of Econometrics and Business Statistics.

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