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On a class of optimization problems emerging when hedging with short term futures contracts

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  • Gunther Leobacher

Abstract

This paper generalizes earlier work by G. Larcher and the author about hedging with short-term futures contracts, a problem which was considered in connection with the debacle of the German company Metallgesellschaft. While the original problem corresponded to the simplest possible model for the price process, i.e. Brownian motion, we give here solutions to more general models, i.e. a mean reverting model (Ornstein–Uhlenbeck process) and geometric Brownian motion. Furthermore we allow for interest rates greater than 0. Copyright Springer-Verlag 2008

Suggested Citation

  • Gunther Leobacher, 2008. "On a class of optimization problems emerging when hedging with short term futures contracts," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 67(1), pages 65-90, February.
    • Handle: RePEc:spr:mathme:v:67:y:2008:i:1:p:65-90
    DOI: 10.1007/s00186-007-0179-4
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    References listed on IDEAS

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    1. Franklin R. Edwards & Michael S. Canter, 1995. "The Collapse Of Metallgesellschaft: Unhedgeable Risks, Poor Hedging Strategy, Or Just Bad Luck?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 8(1), pages 86-105, March.
    2. Neuberger, Anthony, 1999. "Hedging Long-Term Exposures with Multiple Short-Term Futures Contracts," The Review of Financial Studies, Society for Financial Studies, vol. 12(3), pages 429-459.
    3. Christopher L. Culp & Merton H. Miller, 1995. "Metallgesellschaft And The Economics Of Synthetic Storage," Journal of Applied Corporate Finance, Morgan Stanley, vol. 7(4), pages 62-76, January.
    4. Culp Christopher L. & Miller Merton H., 1995. "Metallgesellschaft and the Economics of Synthetic Storage," Zeitschrift für Bankrecht und Bankwirtschaft (ZBB) / Journal of Banking Law and Banking (JBB), RWS Verlag, vol. 7(1), pages 2-14, March.
    5. G. Larcher & G. Leobacher, 2003. "An optimal Strategy for Hedging with Short‐Term Futures Contracts," Mathematical Finance, Wiley Blackwell, vol. 13(2), pages 331-344, April.
    6. Jouini,E. & Cvitanic,J. & Musiela,Marek (ed.), 2001. "Handbooks in Mathematical Finance," Cambridge Books, Cambridge University Press, number 9780521792370.
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    Cited by:

    1. Frestad, Dennis, 2012. "Liquidity and dirty hedging in the Nordic electricity market," Energy Economics, Elsevier, vol. 34(5), pages 1341-1355.

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