Cross hedging with futures in a continuous-time model with a stationary spread
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Fri, 03/06/2011 14:15 |
Prof Stefan Ankirchner (University of Bonn) |
Nomura Seminar  |
DH 1st floor SR |
| When managing risk, frequently only imperfect hedging instruments are at hand. We show how to optimally cross-hedge risk when the spread between the hedging instrument and the risk is stationary. At the short end, the optimal hedge ratio is close to the cross-correlation of the log returns, whereas at the long end, it is optimal to fully hedge the position. For linear risk positions we derive explicit formulas for the hedge error, and for non-linear positions we show how to obtain numerically effcient estimates. Finally, we demonstrate that even in cases with no clear-cut decision concerning the stationarity of the spread it is better to allow for mean reversion of the spread rather than to neglect it. The talk is based on joint work with Georgi Dimitroff, Gregor Heyne and Christian Pigorsch. | |||