Multiperiod hedging with futures contracts

Aaron Low, Jayaram Muthuswamy, Sudipto Sakar and Eric Terry

Journal of Futures Markets, 2002, vol. 22, issue 12, 1179-1203

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

Date: 2002
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