Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/144611
Authors: 
Korn, Olaf
Merz, Alexander
Year of Publication: 
2016
Series/Report no.: 
CFR Working Paper 07-14 [rev.]
Abstract: 
This paper is the first to study the hedging of price risk with uncertain payment dates, a frequent problem in practice. It derives a variance-minimizing hedging strategy for two settings, the first employing linear contracts with different times to maturity and the second allowing for non-linear exotic derivatives. Using commodity prices and exchange rates, we empirically show the optimal strategy clearly outperforms heuristic alternatives in both settings. Non-linear instruments offer advantages with increasing hedge horizons and strongly dependent time and price risk, while linear instruments can suffice for short horizons and weak dependency.
Subjects: 
risk management
hedging
forwards
exotic derivatives
time uncertainty
JEL: 
G30
D81
Document Type: 
Working Paper

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