Optimal hedging and equilibrium in a dynamic futures market

Darrell Duffie · Matthew O. Jackson

68 citations0/0 files storedJournal of Economic Dynamics and Control

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Stochastic processes and financial applications Economic theories and models Risk and Portfolio Optimization

Abstract

This paper considers an agent maximizing the expected utility of the sum of the terminal value of a fixed portfolio of spot market assets and the terminal value of a margin account on a futures trading position. Closed-form solutions for the optimal hedging strategy are provided in several special cases.

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References

2003Stochastic Differential Equations 1980Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis 1980Controlled Diffusion Processes 1973Futures Trading and Investor Returns: An Investigation of Commodity Market Risk Premiums 1991Mean-Variance Hedging in Continuous Time 1981Cross Hedging 1983The Time Pattern of Hedging and the Volatility of Futures Prices 1977Spot rates, forward rates and exchange market efficiency

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2012Dynamic Hedging in Incomplete Markets: A Simple Solution 1997Metallgesellschaft: A prudent hedger ruined, or a wildcatter on NYMEX?1996Optimal Dynamic Hedging in Unbiased Futures Markets 2012Equilibrium in securities markets with heterogeneous investors and unspanned income risk 2008Dynamic Hedging in Incomplete Markets: A Simple Solution 2003Dynamic Asset Allocation

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