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Good Approximation of Exponential Utility Function for Optimal Futures Hedging

Guo, Xu and Lien, Donald and Wong, Wing-Keung (2015): Good Approximation of Exponential Utility Function for Optimal Futures Hedging.

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Abstract

To get optimal production and hedging decision with normal random variables, Lien (2008) compares the exponential utility function with its second order approximation. In this paper, we first extend the theory further by comparing the exponential utility function with a n-order approximation for any integer n. We then propose an approach with illustration how to get the least n one could choose to get a good approximation.

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