Optimal hedging with futures and optimal inversion: A note

This note provides analytical discussion about the theoretical relationships between the optimal futures hedge and inversion ratio. In a two-periods framework it is shown that a theoretical spread between the maximum expected utility and the minimum volatility ratio arises. Only under either no basi...

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Bibliographic Details
Published in:Journal of derivatives & hedge funds 2001-07, Vol.7 (2), p.134
Main Author: Lafuente, Juan Angel
Format: Article
Language:English
Subjects:
Arbitrage
Economics
Expected utility
Futures market
Futures trading
Hedging
Market positioning
Market prices
Optimization
Ratios
Statistical analysis
Stochastic models
Studies
Volatility
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Summary:This note provides analytical discussion about the theoretical relationships between the optimal futures hedge and inversion ratio. In a two-periods framework it is shown that a theoretical spread between the maximum expected utility and the minimum volatility ratio arises. Only under either no basis risk or a random walk assumption in the dynamic evolution of futures market prices both ratios are identical. However, these assumptions are not supported by empirical evidence.
ISSN:1753-9641
1753-965X