How Firms Can Hedge Against Market Risk

Krzysztof Echaust

doi:10.2478/slgr-2014-0016

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How Firms Can Hedge Against Market Risk

Studies in Logic, Grammar and Rhetoric

Volume 37 (2014): Issue 1 (June 2014)

By: Krzysztof Echaust

Open Access

|Aug 2014

Abstract

The article presents a problem of proper hedging strategy in expected utility model when forward contracts and options strategies are available. We consider a case of hedging when an investor formulates his own expectation on future price of underlying asset. In this paper we propose the way to measure effectiveness of hedging strategy, based on optimal forward hedge ratio. All results are derived assuming a constant absolute risk aversion utility function and a Black-Scholes framework.

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