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The Journal of Derivatives

The Journal of Derivatives

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Primary Article

Price Hedging with Local and Aggregate Quantity Risk

Jouahn Nam, Alan L. Tucker and Jason Z Wei
The Journal of Derivatives Winter 2005, 13 (2) 49-69; DOI: https://doi.org/10.3905/jod.2005.605355
Jouahn Nam
At the Lubin School of Business, Pace University, New York. jnam@pace.edu
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  • For correspondence: jnam@pace.edu
Alan L. Tucker
At the Lubin School of Business, Pace University, New York. atucker@pace.edu
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  • For correspondence: atucker@pace.edu
Jason Z Wei
At the Rotman School of Management, University of Toronto, Toronto, Ontario, Canada. wei@rotman.utoronto.ca
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  • For correspondence: wei@rotman.utoronto.ca
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Abstract

The authors present a method to minimize Value–at–Risk where price, local quantity, and aggregate quantity are all stochastic and correlated. The framework is quite general in that it accommodates both local and aggregate quantity, and the quantity variable may be for an asset that is subject to a stochastic convenience yield. The framework is more general than that of Ahn et al. [1999]. The solution identifies an optimal strike price for a quantity–triggered put option used to minimize Value–at–Risk. The authors identify situations where this put option is more effective than its plain–vanilla counterpart in reducing both price and quantity risks.

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The Journal of Derivatives
Vol. 13, Issue 2
Winter 2005
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Price Hedging with Local and Aggregate Quantity Risk
Jouahn Nam, Alan L. Tucker, Jason Z Wei
The Journal of Derivatives Nov 2005, 13 (2) 49-69; DOI: 10.3905/jod.2005.605355

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Price Hedging with Local and Aggregate Quantity Risk
Jouahn Nam, Alan L. Tucker, Jason Z Wei
The Journal of Derivatives Nov 2005, 13 (2) 49-69; DOI: 10.3905/jod.2005.605355
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