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The variance-minimizing hedge with put options

Peter Bell ()

MPRA Paper from University Library of Munich, Germany

Abstract: Certain commodity producers face uncertain output and price, but can trade financial derivatives on price. I consider how best to use a put option on price. I introduce the variance surface, which is a data visualization technique that shows the level of variance across a grid of values for the two choice variables, quantity of options and strike price. The variance-minimizing hedge has strike deep in the money and optimal quantity close to expected output, but the variance surface shows there are near-best choices that are less expensive.

Keywords: Variance-minimizing hedge; put option; simulation; data visualization. (search for similar items in EconPapers)
JEL-codes: C00 C63 G22 G32 Q14 (search for similar items in EconPapers)
Date: 2014-11-15
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