Futures Hedging Models Under Higher Moments And Mark-to-Market Risk

In recent years, big fluctuations are common for the commodities, such as oil and iron.These cause a great demand for futures hedging. However, many companies failed to hedgetheir risk exposure with futures, which makes them be afraid to manage the risk exposure withfutures. Under such circumstances, the issue of how to reasonly hedge the risk exposure withfutures has been an active research topic in recent years. However, the existing studies ignoretwo important risks in determining the optimal hedge strategy: higher moments risk andmark-to-market risk. If the optimal hedge strategies do not consider higher moment's risk, theprobability of extreme loss will greatly increase. If mark-to-market risk is completely ignoredin determining the optimal hedge strategy, the position taked by the hedger will be closed outby the exchange, which leads to the failure of hedging strategy. Based on two important risks,this thesis proposes future hedging models under higher moments risk and mark-to-marketrisk and gives some empirical cases to illustrate the proposed models. The main results andinnovations in this thesis are listed as follows:First, this thesis introduces the higher moments risk into the conventional futureshedging framework.The existing studies ignore the impact of higher moments risk on the hedging strategies.This thesis takes the negative exponential utility function for decision-making function andproposes nonlinear futures hedging model under higher moments. Using the multi-objectivedecision-making approaches, this thesis also proposes futures hedging model under the thirdmoments and gives the optimal hedge ratio. Finally, the cases of hedging oil and copper aregiven to illustrate futures hedging models under higher moments risk. The empirical resultsshow that higher moments have a big impact on the hedge strategy.Second, this thesis incorporates mark-to-market risk into futures hedging models.The existing studies do not consider the mark-to-market risk that is caused by the depositsystem and mark-to-market system. This thesis analyses the effect of mark-to-market risk onthe hedging strategy and proposes three static hedging models under mark-to-market risk:futures hedging models in the cases of own funds and borrowing money; futures hedgingmodel with the interests income and the opportunity cost of the deposit; compositecross-hedging models under mark-to-market risk. We also give the optimal hedge ratios ofthese models. The cases of hedging copper and hot rolled coils are employed to examine thefeasibility of the proposed model. The empirical results show that the proposed models caneliminate mark-to-market risk very well. Third, a new theoretical model is presented to manage the risk exposure of the portfolioincluding raw materials and the commodity under mark-to-market risk.The existing studies are concerned with single commodity hedge. This thesis considersthe hedging problem of a portfolio composed of raw materials and the commodity undermark-to-market risk and extends the conventional single commodity hedging models. Thisthesis also sets up the portfolio hedging model with the income and the opportunity cost of thedeposit. The Lemke algorithm is employed to select the optimal hedging strategy. Finally, thecases of the soybean oil manufacturer are given to illustrate the portfolio hedging modelsunder mark-to-market risk.Four, this thesis proposes multiperiod hedging models with capital constraint.The existing studies ignore the effect of capital constraint on the hedging strategy. Usingdynamic programming, this thesis proposes multiperiod stack-and-roll hedging models withcapital constraint. Considering the inpact of capital constraint on investing the cash, this thesisalso presents multiperiod models for hedging spot assets with one futures when there existscapital constraint. The optimal solutions of the proposed models are obtained by the modeltransformation and backward induction.