Study Of Bilateral Hedging With Capital Constraints

As an important indicator of business performance, profit is susceptible to price level of raw materials and products. Volatility of relative commodity prices will bring huge business risks to enterprises. In order to avoid such risks, some companies will simultaneously hedge in raw materials and products futures market to hedge bilateral risks to obtain a stable and sustainable profit, where we called the strategy bilateral hedging. As we all know enterprises have to obey the margin and market to market system in the use of futures markets, thus improper decisions may lead to close a position early when facing financial constraints. It will seriously affect the hedging effects if that happens. Unlike separate hedging of raw materials and products in traditional way, bilateral hedging is more complex. Thus strategy in bilateral hedging seems very important and complex. Previous researches on the aspect is rare, this study is concerned about the issue of bilateral hedging decisions under capital constraints case, which provide system solutions through the analysis and arguments.In the study, we take the factor of capital constraints into consideration when making decisions for the bilateral hedging and established the basic models and variable constraint models in the case of complete and incomplete markets. The models mentioned above includes profit fluctuation minimizing objective functions and capital constraints conditions established on VaR. Through the analyzing of the objective function and the constraints conditions, we proved that the optimal ratios are on the frontier of the constraints. Furthermore, we show the distinction between the bilateral hedging and traditional hedging. Besides the establishment of models. We do some numerical analysis with NYMEX price data. In the case of complete market, we compare our basic model with strategies including no hedging/OLS hedging/risk accumulation hedging, the results show that our model can provide quantitive relation between hedging ratio and capital constraints, which help hedgers make better decisions to gain better hedging performance. Numerical analysis also show that our basic model can help avoiding risks of close positions at huge extent and help gaining good hedging performance when comparing with the strategy including no hedging/OLS hedging/bilateral OLS hedging in the case of incomplete market. Meanwhile we compare the basic model and variable constraints model by numerical analysis both in complete market and incomplete situations. The result indicates the latter one is a good expansion of basic model,which can effectively solve the problem of hedging ratio decisions when these are several different capital constraints in hedging process.In addition to the study on the establishment and solving of ratio selection models, we also concern on the problem of positions adjustment in hedging in extreme cases. Through analyzing with the three-stage and four-stage model, we drawn some useful conclusions. For example, when the price trend is uncertainty, the timing of the adjustment should be premature because follow period is long so the price will come back to original level, in which case the adjustment will increase volatility of actual transaction price; The adjustment of position should obey conservative strategy, that is to say adjustment for once should not be too big and so on. By combining these qualitative conclusions and model above, we established position adjustment model which includes position adjustment judging criterion and method for the adjustment amount determining. We also carry on numerical analyzed with NYMEX price data. The results show that the model is a effective frame for adjusting the position, which can effectively help decision-makers to determine the timing of position adjustment and give the appropriate adjustment suggestion when it needs.Since this study considers the correlation between spot and future price of raw materials and products, this series model can helps bilateral hedgers make optimize decisions in the case of capital constraints, meanwhile help them to avoid the forced liquidation risks of hedging to get the best hedging performance. In brief, this study has a very good reference value for corporate hedgers.