The variance-minimizing hedge with put options
Peter Bell ()
MPRA Paper from University Library of Munich, Germany
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)
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