Cross-hedging with futures and options: The effects of disappointment aversion |
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| Affiliation: | 1. Pacific Northwest National Laboratory, P.O. Box 999, Mail Stop K6-05, Richland, WA 99352, United States;2. Joint Global Change Research Institute, Pacific Northwest National Laboratory/University of Maryland, 5825 University Research Ct, Suite 3500, College Park, MD 20740, United States;1. College of Economics and Academy of Financial Research, Zhejiang University, Hangzhou 310027, China;2. College of Economics, Zhejiang University, Hangzhou 310027, China |
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| Abstract: | This article examines the effect of disappointment aversion on cross-hedging decisions. We show that, when both futures and options markets are unbiased, disappointment aversion has no effect on the optimal hedge positions. In case that either market is biased, disappointment aversion induces the hedger to behave more conservatively. In addition, as the hedger becomes more disappointment averse, his action is more reserved. It is also found that disappointment aversion tends to depress the importance of the put options whereas the effect of risk aversion is not uniform. Analytical predictions are supplemented by numerical exercises. |
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