Hedging strategies for energy derivatives
In this article, we define a hedging strategy in a setting typical for the commodity market. Firstly, we prove the existence of the locally risk-minimizing (LRM) hedging strategy for payment streams in this setting. Next, a three-step procedure is described to determine the LRM hedging strategy. Then the procedure is illustrated for stochastic volatility models, as these models are a special case of the non-traded situation which frequently occurs in the commodity markets. Finally, we introduce the (adjusted) LRM hedging strategy in the non-traded setting and for this specific setting we numerically show the outperformance of this strategy compared with current market practices.
Year of publication: |
2014
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Authors: | Leoni, P. ; Vandaele, N. ; Vanmaele, M. |
Published in: |
Quantitative Finance. - Taylor & Francis Journals, ISSN 1469-7688. - Vol. 14.2014, 10, p. 1725-1737
|
Publisher: |
Taylor & Francis Journals |
Saved in:
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