Inderscience Publishers

Optimum short-term futures hedge using stochastic linear programming

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Classical optimal hedge ratio concentrates on risk reduction and neglects strategic value maximisation. In this study, the authors use stochastic optimisation theories to formulate an optimal, short-term hedging scheme to mitigate risks while maximising portfolio value. Stochastic spot and futures price models are used to simulate prices. The periodic optimal hedge ratios are determined using the stochastic-optimisation algorithm. The algorithm is implemented in a Hedge-Position-Optimiser (HPO) which is verified and validated using crude oil and gold data. The results show that HPO adds value to projects by increasing portfolio value while reducing the associated risks.

Keywords: optimal hedge ratio, stochastic optimisation, simulation, minerals industry, crude oil, gold, short-term futures, risk assessment, risk reduction, strategic value maximisation, spot price models, futures price models

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