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Certain commodity producers face uncertain output and price, but can trade financial derivatives on price. I consider how best to use a put option on price. I introduce the variance surface, which is a data visualization technique that shows the level of variance across a grid of values for the two choice variables, quantity of options and strike price. The variance-minimizing hedge has strike deep in the money and optimal quantity close to expected output, but the variance surface shows there are near-best choices that are less expensive.

Item Type: MPRA Paper -

Original Title: The variance-minimizing hedge with put options-

Language: English-

Keywords: Variance-minimizing hedge, put option, simulation, data visualization.-

Subjects: C - Mathematical and Quantitative Methods > C0 - General > C00 - GeneralC - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C63 - Computational Techniques ; Simulation ModelingG - Financial Economics > G2 - Financial Institutions and Services > G22 - Insurance ; Insurance Companies ; Actuarial StudiesG - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; GoodwillQ - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q1 - Agriculture > Q14 - Agricultural Finance-

Autor: Bell, Peter N


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