A generalized approach to optimal hedging with option contracts |
| |
Authors: | Emanuele Bajo Massimiliano Barbi |
| |
Affiliation: | Department of Management, University of Bologna, via Capo di Lucca 34, 40126 Bologna, Italy |
| |
Abstract: | In this paper, we develop a theoretical model in which a firm hedges a spot position using options in the presence of both quantity (production) and basis risks. Our optimal hedge ratio is fairly general, in that the dependence structure is modeled through a copula function representing the quantiles of the hedged position, and hence any quantile risk measure can be employed. We study the sensitivity of the exercise price which minimizes the risk of the hedged portfolio to the relevant parameters, and we find that the subjective risk aversion of the firm does not play any role. The only trade-off is between the effectiveness and cost of the hedging strategy. |
| |
Keywords: | optimal hedge ratio option hedging spectral risk measures copula function |
|
|