Futures Hedging Under Mark-to-Market Risk
Journal of Futures Markets, Vol. 23, No. 4, 2003
16 Pages Posted: 17 Oct 2007
This article introduces mark-to-market risk into the conventional futures hedging framework. It is shown that a hedger concerned with maximum daily loss will considerably reduce his futures position when the risk is taken into account. In case of a moderate hedge horizon, the hedger will hedge approximately 80% of his spot position. The effect of mark-to-market risk decreases very slowly as the hedge horizon increases. If the hedger is concerned with average daily loss, the effect is minimal for a moderate hedge horizon.
Keywords: Futures, Hedging, Marking-to-market
JEL Classification: G13
Suggested Citation: Suggested Citation