Abstract
In this paper, we treat output as a decision variable. Moreover, we employ a general form of basis risk. Furthermore, we relax the statistical-independence assumption between the spot price and basis risk.
Highlights
Futures contracts are an important and major financial instrument used by many firms/agents. They are used by firms for both risk minimization and to make speculative profits and it is crucial to examine hedging decisions in the futures markets
The paper employs a general form of basis risk
The previous discussion assumes that the optimal hedge is constant over time ; “Bera, Garcia and Roh (1997) considered the hedge ratio to be time varying and following a random walk” (Lien and Tse 2002)
Summary
Futures contracts are an important and major financial instrument used by many firms/agents. They are used by firms for both risk minimization and to make speculative profits and it is crucial to examine hedging decisions in the futures markets. Examples of theoretical literature include Paroush and Wolf (1992, 1989), Alghalith et al (2011), Alghalith (2009, 2006) and Mckinnon (1967) among many others. Examples of empirical literature include Paroush and Wolf (1989), Li and Vukina (1993), Alghalith (2008a) and Cita and Lien (1992), among many others. The paper employs a general form of basis risk. It relaxes the statistical-independence assumption between the spot price and basis risk
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