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Article: Futures Hedging with Basis Risk and Expectation Dependence

TitleFutures Hedging with Basis Risk and Expectation Dependence
Authors
Issue Date2015
PublisherSpringer.
Citation
International Review of Economics, 2015, v. 62, p. 213-221 How to Cite?
AbstractThis paper examines the behavior of the competitive firm under price uncertainty. The firm has access to a futures market for hedging purposes. Basis risk exists because the random spot and futures prices are not identical at the time when the futures contracts mature. We show that the firm optimally produces less in the presence than in the absence of the basis risk. We show further that the concept of expectation dependence that describes how the basis risk is correlated with either the random spot price or the random futures price plays a pivotal role in determining the firm's optimal futures position. Specifically, an under-hedge is optimal if either the random spot price or the random futures price is negatively expectation dependent on the basis risk. On the other hand, an over-hedge is optimal if the random futures price is positively expectation dependent on the basis risk. The firm's optimal futures position becomes indeterminate if the random spot price is positively expectation dependent on the basis risk.
Persistent Identifierhttp://hdl.handle.net/10722/214698

 

DC FieldValueLanguage
dc.contributor.authorBroll, U-
dc.contributor.authorWelzel, P-
dc.contributor.authorWong, KP-
dc.date.accessioned2015-08-21T11:52:00Z-
dc.date.available2015-08-21T11:52:00Z-
dc.date.issued2015-
dc.identifier.citationInternational Review of Economics, 2015, v. 62, p. 213-221-
dc.identifier.urihttp://hdl.handle.net/10722/214698-
dc.description.abstractThis paper examines the behavior of the competitive firm under price uncertainty. The firm has access to a futures market for hedging purposes. Basis risk exists because the random spot and futures prices are not identical at the time when the futures contracts mature. We show that the firm optimally produces less in the presence than in the absence of the basis risk. We show further that the concept of expectation dependence that describes how the basis risk is correlated with either the random spot price or the random futures price plays a pivotal role in determining the firm's optimal futures position. Specifically, an under-hedge is optimal if either the random spot price or the random futures price is negatively expectation dependent on the basis risk. On the other hand, an over-hedge is optimal if the random futures price is positively expectation dependent on the basis risk. The firm's optimal futures position becomes indeterminate if the random spot price is positively expectation dependent on the basis risk.-
dc.languageeng-
dc.publisherSpringer. -
dc.relation.ispartofInternational Review of Economics-
dc.rightsThe final publication is available at Springer via http://dx.doi.org/[insert DOI]-
dc.titleFutures Hedging with Basis Risk and Expectation Dependence-
dc.typeArticle-
dc.identifier.emailWong, KP: kpwongc@hkucc.hku.hk-
dc.identifier.authorityWong, KP=rp01112-
dc.identifier.doi10.1007/s12232-015-0240-1-
dc.identifier.hkuros249633-
dc.identifier.volume62-
dc.identifier.spage213-
dc.identifier.epage221-

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