The Performance of the A0 (N) Diffusion Model to Hedge a Forward Commitment in the Corn Market
Cédric De Ville de Goyet
The main contribution of this paper is to make an extensive and detailed empirical analysis of the problem of hedging a forward exposure in the corn commodity market. Given the constraints imposed by the agricultural commodity data, I build on the pricing framework developed by Gibson and Schwartz (1990) and Schwartz (1997). They derive futures pricing formulas by imposing the no-arbitrage condition and assuming that the underlying state variables (such as the spot price, the convenience yield and the interest rate) follow a specific joint diffusion process. Provided that there are as many futures contracts as state variables, the forward commitment can be valued and perfectly hedged. This framework is particularly convenient as the Kalman filter can be used to estimate the parameters.
Number of Pages in PDF File: 28
Keywords: Researchworking papers series
Date posted: January 18, 2008
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