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Title:Hedging price risk when payment dates are uncertain PDF Logo
Authors:Korn, Olaf
Issue Date:2009
Series/Report no.:CFR Working Paper 07-14
Abstract:This paper studies the hedging of price risk when payment dates are uncertain, a problem that frequently occurs in practice. It derives and establishes the variance minimizing dynamic hedging strategy, using forward contracts with different times to maturity. The resulting strategy fully hedges the expected price exposure for each possible payment date and is, therefore, easy to implement. An empirical study compares the performance of the variance minimizing strategy with heuristic alternatives, based on data from the crude oil market and the foreign exchange market. Our analysis shows that the variance minimizing strategy clearly outperforms the alternatives for the crude oil market. For the foreign exchange market, a simple static hedging strategy is sufficient.
Subjects:risk management
hedging
forwards
uncertainty of time
JEL:G30
D81
Document Type:Working Paper
Appears in Collections:CFR Working Papers, Centre for Financial Research (CFR), Universität Köln

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