Multi-objective hedging model with the third central moment and the capital budget

Abstract

The third central moment and the capital budget are two important factors in designing the optimal hedge strategy. This paper investigates the problem of futures hedging under the third central moment and the capital budget. Based on the multi-objective programming, a multi-objective hedging model with two important factors is proposed to manage this problem. Using the method of weighted sums, the multi-objective hedging model can be equivalently transformed into an ordinary single-objective programming. By solving the single-objective programming, we derive the optimal hedge ratio under the third central moment and the capital budget. Finally, an empirical example of hedging copper is given to illustrate the application of the proposed model. The results also show clearly the influence of the third central moment and the capital budget in the hedging decision.