"Hedging with Futures in an Intertemporal Portfolio Context"

Michael Adler, Jerome Detemple

© Journal of Futures Markets, 1988
Volume: 8 | Issue: 3 | Pages: 249-69

Publication type: Journal article

Research Archive Topic: Business Economics and Public Policy, Capital Markets and Investments, Corporate Finance

Abstract

The traditional hedging model (THM) posits investors with undiversified portfolios, each consisting of a cash position with a definite maturity and one or more futures. The identity of the cash position is not a question in the THM. For the farmer, it is the value of his crop at harvest time; for the institutional investor, it is the value of a future foreign-currency cash flow. The main problem posed in the futures market literature to date is to determine the optimal hedge, defined as the quantity of futures that either minimizes the variance of the cash-cum-futures position or that maximizes its expected utility.

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