Provisional liquidation of futures hedge programs

Frequently a firm sets a capital allowance for its risk management program such that early liquidation is dictated when the loss from the derivative position exceeds the allowance. Using a two-period framework, we show that the early liquidation decision is supported when futures returns exhibit positive first-order autocorrelation. An empirical study concerning natural gas acquisition of a local distribution company (LDC) demonstrates possibilities of early liquidation underlying optimal hedge policies.