Good Approximation of Exponential Utility Function for Optimal Futures Hedging

Xu Guo, Donald Lien and Wing-Keung Wong

MPRA Paper from University Library of Munich, Germany

Abstract: To get optimal production and hedging decision with normal random variables, Lien (2008) compares the exponential utility function with its second order approximation. In this paper, we first extend the theory further by comparing the exponential utility function with a n-order approximation for any integer n. We then propose an approach with illustration how to get the least n one could choose to get a good approximation.

Keywords: Exponential utility; optimal production; hedging; approximation (search for similar items in EconPapers)
JEL-codes: C0 D81 G11 (search for similar items in EconPapers)
Date: 2015-09-22
New Economics Papers: this item is included in nep-upt
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