Date of Conferral
2015
Degree
Ph.D.
School
Management
Advisor
David Bouvin
Abstract
There is a lack of research in the area of hedging future contracts, especially in illiquid or very volatile market conditions. It is important to understand the volatility of the oil and currency markets because reduced fluctuations in these markets could lead to better hedging performance. This study compared different hedging methods by using a hedging error metric, supplementing the Receding Horizontal Control and Stochastic Programming (RHCSP) method by utilizing the London Interbank Offered Rate with the Levy process. The RHCSP hedging method was investigated to determine if improved hedging error was accomplished compared to the Black-Scholes, Leland, and Whalley and Wilmott methods when applied on simulated, oil, and currency futures markets. A modified RHCSP method was also investigated to determine if this method could significantly reduce hedging error under extreme market illiquidity conditions when applied on simulated, oil, and currency futures markets. This quantitative study used chaos theory and emergence for its theoretical foundation. An experimental research method was utilized for this study with a sample size of 506 hedging errors pertaining to historical and simulation data. The historical data were from January 1, 2005 through December 31, 2012. The modified RHCSP method was found to significantly reduce hedging error for the oil and currency market futures by the use of a 2-way ANOVA with a t test and post hoc Tukey test. This study promotes positive social change by identifying better risk controls for investment portfolios and illustrating how to benefit from high volatility in markets. Economists, professional investment managers, and independent investors could benefit from the findings of this study.
Recommended Citation
Cottrell, Paul Edward, "Dynamically Hedging Oil and Currency Futures Using Receding Horizontal Control and Stochastic Programming" (2015). Walden Dissertations and Doctoral Studies. 293.
https://scholarworks.waldenu.edu/dissertations/293
Included in
Economics Commons, Finance and Financial Management Commons, Oil, Gas, and Energy Commons