Studies in Logic, Grammar and Rhetoric
Mechanisms and Methods of Decision Making / Ed. by Ewa Roszkowska
Published Online: Aug 08, 2014
Page range: 39 - 49
DOI: https://doi.org/10.2478/slgr-2014-0016
Keywords
© 2014 Studies in Logic, Grammar and Rhetoric
This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.
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.