Multiperiod Strip Hedging of Forward Commitments

Donald Lien and David R Shaffer

Review of Quantitative Finance and Accounting, 2002, vol. 18, issue 4, 345-58

Abstract: This paper empirically compares two multiperiod hedging strategies--a strip hedge and a stack-and-roll hedge--to hedge a forward commitment. The multiperiod strip hedge is found to outperform the stack-and-roll hedge when forward prices are subject to multiple sources of price uncertainty and to perform no better when only one source of uncertainty is present. Moreover, the relative superiority of the strip hedge increases with the presence of multiple sources of uncertainty. Last, the strip hedge is found to be more costly to trade than the stack-and-roll hedge; however, its cost varies directly with its superiority at reducing risk. Copyright 2002 by Kluwer Academic Publishers

Date: 2002
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