RELAXING THE ASSUMPTIONS OF MINIMUM-VARIANCE HEDGING

Sergio Lence ()

Journal of Agricultural and Resource Economics, 1996, vol. 21, issue 01, 17

Abstract: The most important minimum-variance hedging ration assumptions are (a) that production is deterministic and (b) that all of the agent's wealth is invested in the cash position. Stochastic production greatly reduces optimal hedge ratios. An alternative investment greatly reduces opportunity costs of not hedging by "diluting" the cash position. Stochastic production and/or alternative investments render the costs associated with hedging relatively more important, yielding almost negligible net benefits of hedging. Hence, hedging costs typically dismiss in hedging models for being seemingly negligible are important determinants of hedging behavior.

Keywords: Production; Economics (search for similar items in EconPapers)
Date: 1996
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Citations: View citations in EconPapers (31)

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Related works:
Working Paper: Relaxing the Assumptions of Minimum-Variance Hedging (1996)
Working Paper: Relaxing the Assumptions of Minimum-Variance Hedging (1996)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:jlaare:30990

DOI: 10.22004/ag.econ.30990

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