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The traditional hedging model revisited with a non-observable convenience yield

Author

Listed:
  • Constantin Mellios
  • Pierre Six

    (Pôle Finance Responsable - Rouen Business School - Rouen Business School)

Abstract

This article examines the hedging of constrained commodity positions with futures contracts. We extend the study of Adler and Detemple (1988 a,b) to include a partial information framework where the convenience yield is not observable. As a consequence, futures prices depend on investor's beliefs regarding the value of the convenience yield, and every component of the hedge is impacted by thee beliefs. We achieve a decomposition of the demand that clarifies the impact on the optimal hedge of the beliefs, the spot price and the risk-free rate. This decomposition is crucial to understand our example that examines the case of the copper market.

Suggested Citation

  • Constantin Mellios & Pierre Six, 2011. "The traditional hedging model revisited with a non-observable convenience yield," Post-Print hal-00659232, HAL.
    • Handle: RePEc:hal:journl:hal-00659232
    DOI: 10.1111/j.1540-6288.2011.00312.x
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    Citations

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    Cited by:

    1. Takashi Kato & Jun Sekine & Hiromitsu Yamamoto, 2014. "A One-Factor Conditionally Linear Commodity Pricing Model under Partial Information," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 21(2), pages 151-174, May.
    2. Takashi Kato & Jun Sekine & Hiromitsu Yamamoto, 2014. "A One-Factor Conditionally Linear Commodity Pricing Model under Partial Information," Papers 1406.4275, arXiv.org.
    3. Fouquau, Julien & Six, Pierre, 2015. "A comparison of the convenience yield and interest-adjusted basis," Finance Research Letters, Elsevier, vol. 14(C), pages 142-149.
    4. Chau, Frankie & Kuo, Jing-Ming & Shi, Yukun, 2015. "Arbitrage opportunities and feedback trading in emissions and energy markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 36(C), pages 130-147.

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