Hedging the portfolio of raw materials and the commodity under the mark-to-market risk

This paper considers the hedging problem of a portfolio composed of raw materials and a commodity. A new theoretical model is presented to manage the risk exposure of the portfolio under the mark-to-market risk. Moreover, we employ the Lemke algorithm to obtain the optimal hedging strategy. We use a case of the soybean oil manufacturer from May 2008 to June 2011 to illustrate the proposed model and algorithm. The results show that the mark-to-market risk must be taken into account when devising the hedging strategies.

► This paper considers the hedging portfolio including raw materials and the commodity. ► A new theoretical model for managing the risk exposure is presented. ► The Lemke algorithm is employed for obtaining the optimal hedging strategy. ► The empirical study of the soybean oil manufacturer is provided.