Abstract
In this paper, we are concerned with the optimal hedge ratio under quantity risk as well as discrepancies between the futures market price and its theoretical valuation according to the cost-of-carry model. Assuming a geometric Brownian motion for forecasting process, we model mispricing as a specific noise component in the dynamics of futures market prices, based on which the optimal hedging strategy is calculated. Finally, we illustrate optimal strategy and its properties by numerical examples.
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Supported by the National Natural Science Foundation of China (No.70221001)
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Liu, Qw., Li, Y. & Wang, Sy. Static Hedging with Uncertain Quantity and Departure from the Cost-of-Carry Valuation. Acta Mathematicae Applicatae Sinica, English Series 22, 127–136 (2006). https://doi.org/10.1007/s10255-005-0292-1
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DOI: https://doi.org/10.1007/s10255-005-0292-1