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Dynamic Hedging with Uncertain Production

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  • Karp, Larry

Abstract

This paper provides a closed-form rule for dynamic hedging with production uncertainty. The rule is obtained by considering a discret e time control problem, in the limit, as the interval between hedging opportunities goes to zero. Price may be expected to increase or decrease so that a speculative motive is present. In the absence of this motive and of discounting, the optimal hedge is myopic. For a given expected rate of change in price, the hedge may be expected to rise or fall depending on the degree of risk aversion. Copyright 1988 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
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Suggested Citation

  • Karp, Larry, 1985. "Dynamic Hedging with Uncertain Production," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt20k8j5kh, Department of Agricultural & Resource Economics, UC Berkeley.
    • Handle: RePEc:cdl:agrebk:qt20k8j5kh
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    Cited by:

    1. 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.
    2. Nyassoke Titi Gaston Clément & Sadefo Kamdem Jules & Fono Louis Aimé, 2022. "Dynamic optimal hedge ratio design when price and production are stochastic with jump," Annals of Finance, Springer, vol. 18(3), pages 419-428, September.
    3. Nyassoke Titi Gaston Clément & Jules Sadefo-Kamdem & Louis Aimé Fono, 2019. "Dynamic Optimal Hedge Ratio Design when Price and Production are stochastic with Jump," Working Papers hal-02417401, HAL.
    4. Moschini, GianCarlo & Myers, Robert J., 2002. "Testing for constant hedge ratios in commodity markets: a multivariate GARCH approach," Journal of Empirical Finance, Elsevier, vol. 9(5), pages 589-603, December.
    5. 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.

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