Abstract
The purpose of this chapter is to propose and illustrate a simple measure of the risk of a cash shortfall arising from the funding requirements of a futures hedge. We give particular attention to the probability of a large shortfall anytime up to a specified horizon as opposed to merely at that horizon. Rough approximations to such probabilities are available through the theory of Gaussian extremes (as in Adler [1990] and Piterbarg [1996]) and the theory of large deviations (as in Dembo and Zeitouni [1998] and Stroock [1984]); we compare the shortfall risk in alternative hedging strategies through these approximations.
Copyright Cambridge University Press 2001. Reprinted with permission.
Full Citation
.
“Shortfall risk in long-term hedging with short-term futures contracts.”
In
Option Pricing, Interest Rates and Risk Management
,
edited by ,
477
-508
.
New York
:
Cambridge University Press
,
2001.