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A Dynamic Minimum Variance Hedge

Author

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  • Lence, Sergio H.
  • Kimle, Kevin L.

Abstract

The study presents an operational dynamic minimum variance hedge ratio (DMV) that allows for updates of both cash and futures positions. It is shown that DMV is more general than other operational models in the hedging literature. including the traditional static minimum-variance hedge ratio (SMV). Estimation of DMV is illustrated with a corn storage problem. The example reveals relatively noticeable differences among the magnitudes of DMV and alternative operational hedge ratios. However, gains in hedging effectiveness from using DMV instead of the simpler SMV are negligible.
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Suggested Citation

  • Lence, Sergio H. & Kimle, Kevin L., 1992. "A Dynamic Minimum Variance Hedge," 1981-1999 Conference Archive 285895, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    • Handle: RePEc:ags:nc8191:285895
    DOI: 10.22004/ag.econ.285895
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    1. is not listed on IDEAS
    2. Lai, Jing-Yi & Myers, Robert J. & Hanson, Steven D., 2001. "Optimal Post-Harvest Grains Storage By Risk Averse Farmers," Staff Paper Series 11739, Michigan State University, Department of Agricultural, Food, and Resource Economics.
    3. Regmund, Wes & Robinson, John & Anderson, David, 2017. "Higher and More Stable Returns From Cottonseed," 2017 Annual Meeting, February 4-7, 2017, Mobile, Alabama 252813, Southern Agricultural Economics Association.
    4. Wang, Qizhi & Chidmi, Benaissa, "undated". "Cotton Price Risk Management across Different Countries," 2009 Annual Meeting, January 31-February 3, 2009, Atlanta, Georgia 46762, Southern Agricultural Economics Association.
    5. Lai, Jing-Yi & Myers, Robert J. & Hanson, Steven D., 2003. "Optimal On-Farm Grain Storage by Risk-Averse Farmers," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 28(3), pages 1-22, December.
    6. Chen, Ren-Raw & Leistikow, Dean & Wang, Andrew, 2020. "Futures minimum variance hedge ratio determination: An ex-ante analysis," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    7. Hyun Seok Kim & B. Wade Brorsen, 2012. "Can real option values explain apparent storage at a loss?," Applied Economics, Taylor & Francis Journals, vol. 44(16), pages 2081-2090, June.
    8. Michael S. Haigh & Matthew T. Holt, 2002. "Combining time-varying and dynamic multi-period optimal hedging models," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 29(4), pages 471-500, December.
    9. Lence, Sergio H., 1996. "Relaxing The Assumptions Of Minimum-Variance Hedging," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 21(01), pages 1-17, July.

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