Futures Hedging Under Mark-to-Market Risk

Journal of Futures Markets, Vol. 23, No. 4, 2003

16 Pages Posted: 17 Oct 2007

See all articles by Anlong Li

Anlong Li

KL Capital

Donald D. Lien

University of Texas at San Antonio - College of Business - Department of Economics

Abstract

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

Li, Anlong and Lien, Donald, Futures Hedging Under Mark-to-Market Risk. Journal of Futures Markets, Vol. 23, No. 4, 2003. Available at SSRN: https://ssrn.com/abstract=1021792

Anlong Li (Contact Author)

KL Capital ( email )

141 Jackson Blvd
Suite 1650
Chcago, IL 60604
United States

Donald Lien

University of Texas at San Antonio - College of Business - Department of Economics ( email )

6900 North Loop 1604 West
San Antonio, TX 78249
United States
210-458-4313 (Phone)
210-458-4308 (Fax)

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