Hedging Long-Term Forwards with Short-Term Futures: A Two-Regime Approach

Wolfgang Bühler (), Olaf Korn () and Rainer Schöbel ()

Review of Derivatives Research, 2005, vol. 7, issue 3, 185-212

Abstract: In this paper we investigate Metallgesellschaft’s problem of hedging long-term forwards with short-term futures. Very different hedging strategies have been proposed in the literature. We attribute these differences to the underlying valuation approaches for oil futures and empirically compare five model-based hedging strategies. In particular, we consider a strategy which results from a two-regime pricing model. This continuous-time equilibrium model reflects the observation that prices of oil futures exhibit a very different behavior for low and high oil prices. Our empirical study shows that time diversification is the dominant effect for an effective hedging of long-term oil forwards with short-term futures. Copyright Kluwer Academic Publishers 2005

Keywords: long-term forwards; hedging; Metallgesellschaft case; two-regime pricing. (search for similar items in EconPapers)
Date: 2005
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DOI: 10.1007/s11147-004-4809-1

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