SPECULATION AND HEDGING IN COMMODITY OPTIONS - A MODIFICATION OF WOLF PORTFOLIO MODEL

This article modifies the Wolf (Journal of Economics and Business 39:141-158, 1987) mean-variance portfolio model containing physicals, futures, and options. The modification is accomplished through an endogenization of the variance-covariance matrix of portfolio returns. This endogenization reduces the investor's informational input to two variables: the mean and variance of the future underlying price distribution. An analysis of the analytical form of the model basically supports the results of Wolf. However, because of the mathematical formulation of the model, the speculative and hedging effects of new information on the mean and variance can be separated out for analytical and simulation purposes.