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How to hedge if the payment date is uncertain?

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  • Olaf Korn
  • Alexander Merz

Abstract

This paper investigates how firms should hedge price risk when payment dates are uncertain. We derive variance‐minimizing strategies and show that the instrument choice is essential for this problem, similar to the choice between a strip and a stack hedge. The first setting concentrates on futures hedges, whereas the second allows for nonlinear derivatives. In both settings, firms should take positions in derivatives with different maturities simultaneously. We present an empirical analysis for commodities and exchange rates, showing that in both settings the optimal strategy clearly outperforms the commonly used heuristic strategies which consider only one hedging instrument at a time.

Suggested Citation

  • Olaf Korn & Alexander Merz, 2019. "How to hedge if the payment date is uncertain?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(4), pages 481-498, April.
    • Handle: RePEc:wly:jfutmk:v:39:y:2019:i:4:p:481-498
    DOI: 10.1002/fut.21987
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