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...

This study analyzes the types and frequencies of hedges and intensifiers employed in NS and NNS academic essays included in a corpus of L1 and L2 student academic texts (745 essays/220,747 words). The overarching goal of this investigation is to focus on these lexical and syntactic features of written discourse because they effectively lend themselves to instruction in L2 academic writing cours...

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...

This paper explores the merits of hedging stochastic input costs (i.e., reducing the risk of adverse changes in costs) in a decentralized, risk neutral supply chain. Specifically, we consider a generalized version of the well-known ‘selling-to-the-newsvendor’ model in which both the upstream and the downstream firms face stochastic input costs. The firms’ operations are intertwined – i.e., the ...

This article attempts to extend the complete market option pricing theory to incomplete markets. Instead of eliminating the risk by a perfect hedging portfolio, partial hedging will be adopted and some residual risk at expiration will be tolerated. The risk measure (or risk indifference) prices charged for buying or selling an option are associated to the capital required for dynamic hedging so...