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A New Class Of Commodity Hedging Strategies: A Passport Options Approach

Author

Listed:
  • VICKY HENDERSON

    (Nomura Centre for Quantitative Finance, Mathematical Institute, 24–29 St. Giles', Oxford OX1 3LB, UK)

  • DAVID HOBSON

    (Dept. Mathematical Sciences, University of Bath, Bath BA2 7AY, UK)

  • GLENN KENTWELL

    (Global Commodities, Citigroup Centre, 2 Park St, Sydney N.S.W., Australia)

Abstract

We provide a new way of hedging a commodity exposure which eliminates downside risk without sacrificing upside potential. The tool used is a variant on the equity passport option and can be used with both futures and forwards contracts as the underlying hedge instrument. Results are given for popular commodity price models such as Gibson-Schwartz and Black with convenience yield. Two different scenarios are considered, one where the producer places his usual hedge and undertakes additional trading, and the other where the usual hedge is not held. In addition, a comparison result is derived showing that one scenario is always more expensive than the other. The cost of these methods are compared to buying a put option on the commodity.

Suggested Citation

  • Vicky Henderson & David Hobson & Glenn Kentwell, 2002. "A New Class Of Commodity Hedging Strategies: A Passport Options Approach," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 5(03), pages 255-278.
    • Handle: RePEc:wsi:ijtafx:v:05:y:2002:i:03:n:s0219024902001390
    DOI: 10.1142/S0219024902001390
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    Cited by:

    1. Yang Wang & Baojun Bian & Zijiang Yang & Jizhou Zhang, 2019. "The Valuation of American Passport Options: A Viscosity Solution Approach," Journal of Optimization Theory and Applications, Springer, vol. 180(2), pages 608-633, February.
    2. Yang Wang & Baojun Bian & Jizhou Zhang, 2014. "Viscosity Solutions of Integro-Differential Equations and Passport Options in a Jump-Diffusion Model," Journal of Optimization Theory and Applications, Springer, vol. 161(1), pages 122-144, April.

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