OPTIMAL HEDGING IN A DYNAMIC FUTURES MARKET WITH A NONNEGATIVITY CONSTRAINT ON WEALTH

This paper examines the issue of optimal hedging demands for futures c ontracts from an investor who cannot freely trade his portfolio of pri mitive assets in the context of lognormal, rather than normal, returns and of a constant absolute risk aversion utility function. In this co ntext, the nonnegativity constraint on wealth is binding and the optim al hedging demands are not identical with those encountered in the bul k of the literature, which has largely overlooked this problem. Negati ve results concerning the derivation of equilibrium in the futures mar kets and the computation of the open interests then follow.