Dynamic optimal hedge ratio design when price and production are stochastic with jump

In this paper, we focus on the farmer’s risk income when using commodity futures, when price and output processes are randomly correlated and represented by jump-diffusion models. We evaluate the expected utility of the farmer’s wealth and determine the optimal consumption rate and hedging position...

Full description

Saved in:
Bibliographic Details
Published inAnnals of finance Vol. 18; no. 3; pp. 419 - 428
Main Authors Gaston Clément, Nyassoke Titi, Jules, Sadefo Kamdem, Aimé, Fono Louis
Format Journal Article
LanguageEnglish
Published Berlin/Heidelberg Springer Berlin Heidelberg 01.09.2022
Springer Nature B.V
Springer Verlag
Subjects
Commodity futures
Economic Theory/Quantitative Economics/Mathematical Methods
Economics and Finance
Farmers
Finance
Hedging
Humanities and Social Sciences
Income
Macroeconomics/Monetary Economics//Financial Economics
Quantitative Finance
Research Article
Stochastic models
Q12
Futures
Jump-diffusion process
Q14
G52
Lévy measure
G13
Risk management
D81
stochastic dynamic programming
risk management
futures
Online AccessGet full text

Cover

More Information
Summary:In this paper, we focus on the farmer’s risk income when using commodity futures, when price and output processes are randomly correlated and represented by jump-diffusion models. We evaluate the expected utility of the farmer’s wealth and determine the optimal consumption rate and hedging position at each point in time given the harvest timing and state variables. We find a closed form for the optimal consumption and positioning rate in the case of an investor with CARA utility. This result (see Table 3.3) is a generalization of the result of Ho (J Financ 39:351–376, 1984), which considers the special case in which price and output are diffusion models.
ISSN:1614-2446
1614-2454
DOI:10.1007/s10436-022-00410-1