Timing the value-at-risk hedge

Abstract

This chapter adopts value at risk (VaR) to analyze the hedge timing issue. Suppose that a producer, at a give time, recognizes the possible need of a futures contract for risk reduction purpose. Should the producer trade in the futures market immediately or should he wait? Conditions are characterized under which delaying the hedge decision is preferred as it produces a smaller VaR. For an efficient futures market, it appears that the producer is better off delaying the hedge decision as long as possible. However, strong backwardation promotes early hedging.

Citation

Lien, D. (2009), "Timing the value-at-risk hedge", Chen, A.H. (Ed.) Research in Finance (Research in Finance, Vol. 25), Emerald Group Publishing Limited, Leeds, pp. 333-341. https://doi.org/10.1108/S0196-3821(2009)0000025014