How Firms Should Hedge: An Extension

9 Pages Posted: 20 Feb 2008

See all articles by Olaf Korn

Olaf Korn

University of Goettingen (Göttingen)

Date Written: February 20, 2008

Abstract

This note studies a firm's optimal hedging strategy with tailor-made exotic derivatives under both price risk and quantity risk. It extends the analysis of Brown and Toft (2002) by relaxing the distributional assumptions. The optimal pay-off function of a derivative contract is characterized in terms of the expectation and variance of the quantity, conditional on the price. This main result is illustrated by different examples, stressing the importance of the dependence structure between price risk and quantity risk for the choice of appropriate hedging instruments.

Keywords: risk management, hedging, quantity risk, exotic derivatives

JEL Classification: G30, D81

Suggested Citation

Korn, Olaf, How Firms Should Hedge: An Extension (February 20, 2008). Available at SSRN: https://ssrn.com/abstract=1095709 or http://dx.doi.org/10.2139/ssrn.1095709

Olaf Korn (Contact Author)

University of Goettingen (Göttingen) ( email )

Platz der Gottinger Sieben 3
Gottingen, D-37073
Germany
++49 551 39 7265 (Phone)
++49 551 39 7665 (Fax)

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