We explore optimal hedge ratios and hedging effectiveness for the German electricity market. Given the increasing attention that wavelets received in the financial market, we concentrate on the investigation of the relationship, covariance/coherence evolution and hedge ratio analysis, on a time-frequency-scale approach (discrete and continuous), between electricity spot and futures. Simpler app...

In this paper, we show that although minimum-variance hedging unambiguously reduces the standard deviation of portfolio returns, it tends to increase portfolio kurtosis and consequently the effectiveness of hedging in terms of a more general measure of risk such as VaR is uncertain. We compare the reduction in standard deviation with the reduction in 99% VaR for thirteen cross-hedged currency p...

Organisms use various strategies to cope with fluctuating environmental conditions. In diversified bet-hedging, a single genotype exhibits phenotypic heterogeneity with the expectation that some individuals will survive transient selective pressures. To date, empirical evidence for bet-hedging is scarce. Here, we observe that individual Drosophila melanogaster flies exhibit striking variation i...

We consider situations where a pension plan has opted to hedge its longevity risk using an index-based longevity hedging instrument such as a q-forward or deferred longevity swap. The use of index-based hedges gives rise to basis risk, but benefits, potentially, from lower costs to the hedger and greater liquidity. We focus on quantification of optimal hedge ratios and hedge effectiveness and i...

The basic contracts traded on energy exchanges involve fixed-rate payments for the delivery of electricity over a certain period of time. It has been shown that options on these electricity swaps can be priced efficiently using a Hilbert space-valued time-inhomogeneous jump-diffusion model for the forward curve. We consider the mean-variance hedging problem for European options under this model...

This paper examines a simple basis risk model based on correlated geometric Brownian motions. We apply quadratic criteria to minimize basis risk and hedge in an optimal manner. Initially, we derive the Föllmer–Schweizer decomposition for a European claim. This allows pricing and hedging under the minimal martingale measure, corresponding to the local risk-minimizing strategy. Furthermore, since...

In this study, we examine the relation between corporate hedging and firm focus in the REIT industry. The REIT industry is suitable for the investigation for various reasons, with the primary one being that the tax codes of REITs restrict their abilities to use derivatives for speculative purposes. We find 46.41% utilization rate in 2005 and 43.41% in 2007. Consistent with our hypothesis, we fi...

To preserve fitness in unpredictable, fluctuating environments, a range of biological systems probabilistically generate variant phenotypes--a process often referred to as 'bet-hedging', after the financial practice of diversifying assets to minimize risk in volatile markets. The molecular mechanisms enabling bet-hedging have remained elusive. Here, we review how HIV makes a bet-hedging decisio...

We analyze the optimal hedging policy of a firm that has flexibility in the timing of investment, but faces a constraint on its ability to raise external funds. By reducing the risk that the firm's ability to finance investment will disappear, hedging restores its timing flexibility and thus raises the payoff threshold required to justify investment. The principal implication of this result is ...

In view of the recent documented hedging bias attributable to failing to accommodate volatility long memory, we suggest to use the simple, yet superior, realized variancecovariance (RVCOV) in dynamic hedging. For its incremental value from intradaily information, model-free and inherent long memory, RVCOV has been shown to be accurate without misspecification bias and easily generalized to high...