Interest rate risk in long-dated commodity options positions: To hedge or not to hedge?

Publication Type:
Journal Article
Journal of Futures Markets, 2019, 39 (1), pp. 109 - 127
Issue Date:
Filename Description Size
Cheng et al 2019 Journal of Futures Markets.pdfPublished Version1.65 MB
Adobe PDF
Full metadata record
© 2018 Wiley Periodicals, Inc. We empirically assess hedging interest rate risk beyond the conventional delta, gamma, and vega hedges in long-dated crude oil options positions. Using factor hedging in a model featuring stochastic interest rates and stochastic volatility, interest rate hedges consistently provide an improvement beyond delta, gamma, and vega hedges. Under high interest rate volatility and/or when a rolling hedge is used, combining interest rate and delta hedging improves performance by up to four percentage points over the common hedges of gamma and/or vega. Thus, contrary to common practice, hedging interest rate risk should have priority over these “second-order” hedges.
Please use this identifier to cite or link to this item: