Good Approximation of Exponential Utility Function for Optimal Futures Hedging

Xu Guo, Donald Lien, Wing Keung Wong*

*Corresponding author for this work

    Research output: Contribution to journalJournal articlepeer-review

    Abstract

    Within the optimal production and hedging decision framework, Lien compares the exponential utility function with its second order approximation under the normality distribution assumption. In this paper, we first extend the result further by comparing the exponential utility function with a 2n-order approximation for any integer n. We then propose an approach with illustration to find the smallest n that provides a good approximation.
    Original languageEnglish
    Pages (from-to)457-463
    Number of pages7
    JournalJournal of Mathematical Finance
    Volume6
    Issue number3
    DOIs
    Publication statusPublished - Aug 2016

    User-Defined Keywords

    • Exponential Utility Function
    • Optimal Production
    • Hedging
    • 2n-Order Approximation

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