The incentive on an electricity generating firm to exercise market power depends strongly on the volume the firm has pre-sold in the forward or hedge markets. Therefore, in order to forecast the effect of mergers and other market developments on market power outcomes, it is essential to model the hedging decisions of dominant generating firms. This paper shows that a dominant firm’s profit-maxi...

This paper presents hedging strategies for European and exotic options in a Lévy market. By applying Taylor's Theorem, dynamic hedging portfolios are constructed under different market assumptions, such as the existence of power jump assets or moment swaps. In the case of European options or baskets of European options, static hedging is implemented. It is shown that perfect hedging can be achi...

During the recent European sovereign debt crisis, returns on EMU government bond portfolios experienced substantial volatility clustering, leptokurtosis and skewed returns, as well as correlation spikes. Asset managers invested in European government bonds had to derive new hedging strategies to deal with the changing return properties and the higher level of uncertainty. In this market environ...

This article investigates the optimal crop planting schedule and hedging strategy in the mean return versus CVaR risk framework. Crop insurances and futures contracts are available for hedging against yield and price risks. The impact of the ENSO-based climate forecast on the optimal production and hedging decision is examined. Gaussian copula is applied in simulating the scenarios of correlate...

This research compares partial equilibrium and statistical time-series approaches to hedging. The finance literature stresses the former approach, while the applied economics literature has focused on the latter. We compare the out-of-sample hedging effectiveness of the two approaches when hedging commodity price risk using futures contracts. For various methods of parameter estimation and infe...

This paper presents hedging strategies for European and exotic options in a Lévy market. By applying Taylor's theorem, dynamic hedging portfolios are constructed under different market assumptions, such as the existence of power jump assets or moment swaps. In the case of European options or baskets of European options, static hedging is implemented. It is shown that perfect hedging can be achi...

In this paper we study the dynamic hedging problem using three different utility specifications: stochastic differential utility, terminal wealth utility, and a new utility transformation which includes features from the two previous approaches. In all three cases, we assume Markovian prices. While stochastic differential utility (SDU) has an ambiguous effect on the pure hedging demand, it does...

In this paper we study the hedging of derivatives in illiquid markets. More specifically we consider a model where the implementation of a hedging strategy affects the price of the underlying security. Following earlier work we characterize perfect hedging strategies by a nonlinear version of the Black-Scholes PDE. The core of the paper consists of a simulation study. We present numerical resul...

In this paper we consider the problem of hedging contingent claims on a stock under transaction costs and stochastic volatility. Extensive research has clearly demonstrated that the volatility of most stocks is not constant over time. As small changes of the volatility can have a major impact on the value of contingent claims, hedging strategies should try to eliminate this volatility risk. We ...

A key question is why many globally active firms forgo foreign exchange hedging despite its low costs. We propose an explanation based on incomplete hedging markets that further suggests that operational hedging is often a more effective hedge. We use 10-K filings to construct text-based measures of financial hedging and three offshore activities: the sale of output, the purchase of input, and ...