New York:

Abstract

The price volatilities of the commodities expose commodity trading companies to the risk of big financial losses and force them to combat the risk with a spectrum of hedging strategies. In this paper, we study strategies to reduce shortfall risk in long-term hedging with short-term futures contracts. Our main contribution to the literature is extending Glasserman’s model (2001) to a two-commodity scenario and providing numerical solutions for risk analysis across alternative hedging strategies to minimize either running risk or average risk. In the end, we illustrate a scenario when optimal average risk is superior to optimal fraction strategy if investors wish to receive large returns at the end of the hedging horizon.