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IMA Journal of Management Mathematics Advance Access published online on June 25, 2009
IMA Journal of Management Mathematics, doi:10.1093/imaman/dpp013
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© The authors 2009. Published by Oxford University Press on behalf of the Institute of Mathematics and its Applications. All rights reserved.

Hedging mean-reverting commodities

Udo Broll{dagger}

Department of Business Management and Economics, Dresden University of Technology, 01062 Dresden, Germany

Ephraim Clark

Middlesex University, The Burroughs, London NW4 4BT, UK, and Univ. Lille Nord de France, Lille School of Finance, Euralille 59777, France

Elmar Lukas

Department of Economics, University of Paderborn, 33098 Paderborn, Germany

{dagger} Email: udo.broll{at}tu-dresden.de

Received on 2 July 2008. Accepted on 22 May 2009.

This paper uses the expected utility framework to examine the optimal hedging decision for commodities with mean-reverting price processes. The derived results show that when commodity prices follow a mean-reverting process, the optimal hedge ratio differs significantly from the classical results found under standard geometric Brownian motion. Hence, a failure to accommodate mean reversion when it exists can lead to systematic biases in hedging decisions.

Keywords: commodity price risk; hedging; mean reverting


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