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Multiperiod hedging with futures contracts

Author

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  • Aaron Low
  • Jayaram Muthuswamy
  • Sudipto Sakar
  • Eric Terry

Abstract

The hedging problem is examined where futures prices obey the cost‐of‐carry model. The resultant hedging model explicitly incorporates maturity effects in the futures basis. Formulas for the optimal static and dynamic hedges are derived. Although these formulas are developed for the case of direct hedging, the framework used is sufficiently flexible so that these formulas can be applied to many cross‐hedging situations. The performance of the model is compared with that of several other models for two hedging scenarios: one involving a financial asset and the other involving a commodity. In both cases, significant maturity effects were found in the first and second moments of the futures basis. Our hedging formulas outperformed other hedging strategies on an ex‐ante basis. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:1179–1203, 2002

Suggested Citation

  • Aaron Low & Jayaram Muthuswamy & Sudipto Sakar & Eric Terry, 2002. "Multiperiod hedging with futures contracts," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 22(12), pages 1179-1203, December.
    • Handle: RePEc:wly:jfutmk:v:22:y:2002:i:12:p:1179-1203
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    Cited by:

    1. Jitmaneeroj, Boonlert, 2018. "The effect of the rebalancing horizon on the tradeoff between hedging effectiveness and transaction costs," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 282-298.
    2. Guglielmo Maria Caporale & Davide Ciferri & Alessandro Girardi, 2014. "Time-Varying Spot and Futures Oil Price Dynamics," Scottish Journal of Political Economy, Scottish Economic Society, vol. 61(1), pages 78-97, February.
    3. Francis In & Sangbae Kim, 2012. "An Introduction to Wavelet Theory in Finance:A Wavelet Multiscale Approach," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 8431, August.
    4. Lucio Sarno & Giorgio Valente, 2005. "Modelling and forecasting stock returns: exploiting the futures market, regime shifts and international spillovers," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(3), pages 345-376, March.
    5. Lang, Korbinian & Auer, Benjamin R., 2020. "The economic and financial properties of crude oil: A review," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).

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