Hedging strategies for energy derivatives
Patrick Leoni (),
N. Vandaele and
Quantitative Finance, 2014, vol. 14, issue 10, 1725-1737
In this article, we define a hedging strategy in a setting typical for the commodity market. Firstly, we prove the existence of the locally risk-minimizing (LRM) hedging strategy for payment streams in this setting. Next, a three-step procedure is described to determine the LRM hedging strategy. Then the procedure is illustrated for stochastic volatility models, as these models are a special case of the non-traded situation which frequently occurs in the commodity markets. Finally, we introduce the (adjusted) LRM hedging strategy in the non-traded setting and for this specific setting we numerically show the outperformance of this strategy compared with current market practices.
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Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:14:y:2014:i:10:p:1725-1737
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