A NEW CLASS OF COMMODITY HEDGING STRATEGIES: A PASSPORT OPTIONS APPROACH

Vicky Henderson (), David Hobson () and Glenn Kentwell ()
Additional contact information
Vicky Henderson: Nomura Centre for Quantitative Finance, Mathematical Institute, 24–29 St. Giles', Oxford OX1 3LB, UK
David Hobson: Dept. Mathematical Sciences, University of Bath, Bath BA2 7AY, UK
Glenn Kentwell: Global Commodities, Citigroup Centre, 2 Park St, Sydney N.S.W., Australia

International Journal of Theoretical and Applied Finance (IJTAF), 2002, vol. 05, issue 03, 255-278

Abstract: We provide a new way of hedging a commodity exposure which eliminates downside risk without sacrificing upside potential. The tool used is a variant on the equity passport option and can be used with both futures and forwards contracts as the underlying hedge instrument. Results are given for popular commodity price models such as Gibson-Schwartz and Black with convenience yield. Two different scenarios are considered, one where the producer places his usual hedge and undertakes additional trading, and the other where the usual hedge is not held. In addition, a comparison result is derived showing that one scenario is always more expensive than the other. The cost of these methods are compared to buying a put option on the commodity.

Keywords: Passport options; futures; forward contract; option pricing; hedging; commodities (search for similar items in EconPapers)
Date: 2002
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219024902001390
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:05:y:2002:i:03:n:s0219024902001390

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219024902001390

Access Statistics for this article

International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston

More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().