Interest rate risk in long‐dated commodity options positions: To hedge or not to hedge?

Benjamin Cheng, Christina Nikitopoulos-Sklibosios () and Erik Schlogl

Journal of Futures Markets, 2019, vol. 39, issue 1, 109-127

Abstract: We empirically assess hedging interest rate risk beyond the conventional delta, gamma, and vega hedges in long‐dated crude oil options positions. Using factor hedging in a model featuring stochastic interest rates and stochastic volatility, interest rate hedges consistently provide an improvement beyond delta, gamma, and vega hedges. Under high interest rate volatility and/or when a rolling hedge is used, combining interest rate and delta hedging improves performance by up to four percentage points over the common hedges of gamma and/or vega. Thus, contrary to common practice, hedging interest rate risk should have priority over these “second‐order” hedges.

Date: 2019
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https://doi.org/10.1002/fut.21954

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Persistent link: https://EconPapers.repec.org/RePEc:wly:jfutmk:v:39:y:2019:i:1:p:109-127

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