This paper is concerned with the risk management practices of an electricity retailer motivated by Dutch market. We examine effectiveness existing base- and peak-load futures contracts as a tool for retailers. analytically characterize retailer’s optimal hedging policy function serial correlation prices demand profiles its customers. find that typically over-hedges in market, over-hedging amoun...

This article investigates the optimal crop planting schedule and hedging strategy in the mean return versus CVaR risk framework. Crop insurances and futures contracts are available for hedging against yield and price risks. The impact of the ENSO-based climate forecast on the optimal production and hedging decision is examined. Gaussian copula is applied in simulating the scenarios of correlate...

This research compares partial equilibrium and statistical time-series approaches to hedging. The finance literature stresses the former approach, while the applied economics literature has focused on the latter. We compare the out-of-sample hedging effectiveness of the two approaches when hedging commodity price risk using futures contracts. For various methods of parameter estimation and infe...

This paper presents hedging strategies for European and exotic options in a Lévy market. By applying Taylor's theorem, dynamic hedging portfolios are constructed under different market assumptions, such as the existence of power jump assets or moment swaps. In the case of European options or baskets of European options, static hedging is implemented. It is shown that perfect hedging can be achi...

In this paper we study the dynamic hedging problem using three different utility specifications: stochastic differential utility, terminal wealth utility, and a new utility transformation which includes features from the two previous approaches. In all three cases, we assume Markovian prices. While stochastic differential utility (SDU) has an ambiguous effect on the pure hedging demand, it does...

In this paper we study the hedging of derivatives in illiquid markets. More specifically we consider a model where the implementation of a hedging strategy affects the price of the underlying security. Following earlier work we characterize perfect hedging strategies by a nonlinear version of the Black-Scholes PDE. The core of the paper consists of a simulation study. We present numerical resul...

In this paper we consider the problem of hedging contingent claims on a stock under transaction costs and stochastic volatility. Extensive research has clearly demonstrated that the volatility of most stocks is not constant over time. As small changes of the volatility can have a major impact on the value of contingent claims, hedging strategies should try to eliminate this volatility risk. We ...

M any firms face environments with long manufacturing leadtimes, great product variety, and uncertain, nonstationary demand. A challenge is how to plan production and inventories to provide the best customer service at the least cost. In this paper, we first describe an application at Teradyne in which we implemented an inventory hedge to protect against cyclic demand variability. Based on this...

A key question is why many globally active firms forgo foreign exchange hedging despite its low costs. We propose an explanation based on incomplete hedging markets that further suggests that operational hedging is often a more effective hedge. We use 10-K filings to construct text-based measures of financial hedging and three offshore activities: the sale of output, the purchase of input, and ...

The sovereign debt crisis challenged investors in European government bonds to deal with volatile interest rate spreads. For managing sovereign risk, “Eurex” introduced futures contracts on Italian government bonds reflecting risks of lower rated countries. We analyze hedging strategies for bond portfolios with futures on German and Italian government bonds before and during the sovereign debt ...