Optimal Dynamic Hedging in Unbiased Futures Markets

8 Pages Posted: 24 Mar 2020

See all articles by Robert J. Myers

Robert J. Myers

Michigan State University - Department of Agricultural Economics

Steven D. Hanson

Michigan State University - Department of Agricultural Economics

Date Written: February 1996

Abstract

A discrete‐time dynamic hedging problem is solved under expected utility maximization and basis risk without imposing a particular parametric form for utility, nor assuming normally distributed cash and futures prices. The solution is valid for any increasing and strictly concave utility function, and for quite general specifications of the joint distribution of cash and futures prices. This generality is achieved by restricting the futures market to be unbiased, and requiring that the size of the cash position be nonstochastic. The dynamic hedging rule can be estimated empirically using similar methods to those used to estimate static hedge ratios.

Keywords: discounting, dynamic hedging, mean reversion, unbiased futures markets, G130, Q140

Suggested Citation

Myers, Robert J. and Hanson, Steven D., Optimal Dynamic Hedging in Unbiased Futures Markets (February 1996). American Journal of Agricultural Economics, Vol. 78, Issue 1, pp. 13-20, 1996. Available at SSRN: https://ssrn.com/abstract=3559760 or http://dx.doi.org/10.2307/1243774

Robert J. Myers (Contact Author)

Michigan State University - Department of Agricultural Economics ( email )

East Lansing, MI 48824
United States
517-432-3649 (Phone)

Steven D. Hanson

Michigan State University - Department of Agricultural Economics ( email )

East Lansing, MI 48824
United States
517-353-1870 (Phone)
517-432-1800 (Fax)

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