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- Title
STATE-DEPENDENT PREFERENCES AND FUTURES HEDGING: THE EFFECTS OF BASIS RISK.
- Authors
Lien, Donald
- Abstract
This note incorporates basis risk into the futures hedging decision-making problem when the hedger has a state-dependent preference. It is shown that, in an unbiased futures market, a partial hedge is optimal when the marginal utilities in different states are moderately close to each other. Conditions for a Texas hedge or an overhedge are provided. Finally, it is demonstrated that basis risk always reduces the futures trading volume.
- Subjects
HEDGING (Finance); FUTURES; DECISION making; INVESTMENTS; DERIVATIVE securities; FUTURES market
- Publication
Pacific Economic Review, 2004, Vol 9, Issue 2, p143
- ISSN
1361-374X
- Publication type
Article
- DOI
10.1111/j.1468-0106.2004.00218.x