{"id":{"repo_id":"uiuc","oai_identifier":"oai:www.ideals.illinois.edu:2142/109434"},"canonical_url":"https://search.dev.ndltd.org/etd/uiuc/oai:www.ideals.illinois.edu:2142/109434","repository":{"repo_id":"uiuc","name":"University of Illinois - Urbana-Champaign","base_url":"https://www.ideals.illinois.edu/oai-pmh"},"display":{"title":"Option hedging error in commodity markets","abstract":"Hedging options are a common practice to reduce or specify the risk of an option position. In most institutions, it takes place daily. The hedge coefficients used are often determined by the Black Scholes option pricing model and are commonly referred to as the “greeks”. Although the flaws of the Black Scholes model are well known, the model is still extremely useful and the most commonly used approach. The hedge error is defined as the difference in the profit and loss of the option position and the hedge position. Hedging an option reduces the volatility of an option position. In practice, the volatility of the position cannot be reduced to zero. This thesis studies the remaining volatility known as hedge error. This thesis examines how moneyness and tenor affect hedge error in order to help a trader manage the hedge error. Secondly, this thesis investigates which subset of the greeks provides an optimal and economically significant reduction in volatility. Corn, lean hogs, and crude oil are the three commodities that are investigated in this thesis. The results are additionally separated into puts and calls. The results show that as an option is further out-of-the-money, the hedge error increases by an economically significant amount. Second, this research finds only marginal volatility reduction is achieved by hedging rho, interest rate risk. However, incorporating a gamma and/or vega hedge significantly reduces the volatility of the option portfolio returns.","abstract_html":"Hedging options are a common practice to reduce or specify the risk of an option position. In most institutions, it takes place daily. The hedge coefficients used are often determined by the Black Scholes option pricing model and are commonly referred to as the “greeks”. Although the flaws of the Black Scholes model are well known, the model is still extremely useful and the most commonly used approach. The hedge error is defined as the difference in the profit and loss of the option position and the hedge position. Hedging an option reduces the volatility of an option position. In practice, the volatility of the position cannot be reduced to zero. This thesis studies the remaining volatility known as hedge error. This thesis examines how moneyness and tenor affect hedge error in order to help a trader manage the hedge error. Secondly, this thesis investigates which subset of the greeks provides an optimal and economically significant reduction in volatility. Corn, lean hogs, and crude oil are the three commodities that are investigated in this thesis. The results are additionally separated into puts and calls. The results show that as an option is further out-of-the-money, the hedge error increases by an economically significant amount. Second, this research finds only marginal volatility reduction is achieved by hedging rho, interest rate risk. However, incorporating a gamma and/or vega hedge significantly reduces the volatility of the option portfolio returns.","abstract_has_math":false,"creators":["Olson, Ryan Paul"],"institution":"University of Illinois at Urbana-Champaign","degree_name":"M.S.","degree_level":"Thesis","degree_discipline":"Agricultural & Applied Econ","degree_department":null,"school":null,"contributors":["Sherrick, Bruce J","Robe, Michel A","Garcia, Philip"],"advisors":[],"committee_chairs":[],"committee_members":[],"year":2021,"date_issued":"2021-03-05T21:38:20Z","date_published":"2021-03-05T21:38:20Z","updated_at":"2026-07-22T22:24:50Z","subjects":["Options, Hedging, Financial Engineering, Agricultural Economics"],"languages":["en"],"rights":["2020 by Ryan Paul Olson. All rights reserved"],"rights_urls":[],"identifier_entries":[]},"links":{"outbound_url":"http://hdl.handle.net/2142/109434","outbound_label":"Handle","outbound_source":"dc:identifier"},"metadata_groups":[{"id":"people","label":"People","entries":[{"key":"dc:contributor","label":"Contributor","values":["Sherrick, Bruce J","Robe, Michel A","Garcia, Philip"]},{"key":"dc:creator","label":"Author","values":["Olson, Ryan Paul"]}]},{"id":"academic_context","label":"Academic Context","entries":[{"key":"dc:date","label":"Dc Date","values":["2021-03-05T21:38:20Z","2020-12-07","2020-12"]},{"key":"dc:type","label":"Dc Type","values":["text","Thesis"]},{"key":"thesis:degree_discipline","label":"Discipline","values":["Agricultural & Applied Econ"]},{"key":"thesis:degree_level","label":"Degree Level","values":["Thesis"]},{"key":"thesis:degree_name","label":"Degree Name","values":["M.S."]},{"key":"thesis:institution_name","label":"Thesis Institution Name","values":["University of Illinois at Urbana-Champaign"]}]},{"id":"subjects_keywords","label":"Subjects and Keywords","entries":[{"key":"dc:subject","label":"Dc Subject","values":["Options, Hedging, Financial Engineering, Agricultural Economics"]}]},{"id":"language_rights","label":"Language and Rights","entries":[{"key":"dc:language","label":"Dc Language","values":["en"]},{"key":"dc:rights","label":"Dc Rights","values":["2020 by Ryan Paul Olson. All rights reserved"]}]},{"id":"identifiers","label":"Identifiers","entries":[{"key":"dc:identifier","label":"Identifier","values":["http://hdl.handle.net/2142/109434"]}]},{"id":"additional","label":"Additional Metadata","entries":[{"key":"dc:description","label":"Description","values":["Hedging options are a common practice to reduce or specify the risk of an option position. In most institutions, it takes place daily. The hedge coefficients used are often determined by the Black Scholes option pricing model and are commonly referred to as the “greeks”. Although the flaws of the Black Scholes model are well known, the model is still extremely useful and the most commonly used approach. The hedge error is defined as the difference in the profit and loss of the option position and the hedge position. Hedging an option reduces the volatility of an option position. In practice, the volatility of the position cannot be reduced to zero. This thesis studies the remaining volatility known as hedge error. This thesis examines how moneyness and tenor affect hedge error in order to help a trader manage the hedge error. Secondly, this thesis investigates which subset of the greeks provides an optimal and economically significant reduction in volatility. Corn, lean hogs, and crude oil are the three commodities that are investigated in this thesis. The results are additionally separated into puts and calls. The results show that as an option is further out-of-the-money, the hedge error increases by an economically significant amount. Second, this research finds only marginal volatility reduction is achieved by hedging rho, interest rate risk. However, incorporating a gamma and/or vega hedge significantly reduces the volatility of the option portfolio returns.","Submission original under an indefinite embargo labeled 'Open Access'. The submission was exported from vireo on 2021-03-04 without embargo terms","The student, Ryan Olson, accepted the attached license on 2020-12-03 at 09:54.","The student, Ryan Olson, submitted this Thesis for approval on 2020-12-03 at 09:56.","This Thesis was approved for publication on 2020-12-07 at 10:08.","DSpace SAF Submission Ingestion Package generated from Vireo submission #16052 on 2021-03-04 at 15:36:05","Made available in DSpace on 2021-03-05T21:38:20Z (GMT). No. of bitstreams: 2 OLSON-THESIS-2020.pdf: 2920566 bytes, checksum: 598bccb7c85c9f840f234d25e1e498f5 (MD5) LICENSE.txt: 4207 bytes, checksum: 4a92fa0f012a75d032883ed66c1378d8 (MD5) Previous issue date: 2020-12-07"]},{"key":"dc:format","label":"Dc Format","values":["application/pdf"]},{"key":"dc:title","label":"Title","values":["Option hedging error in commodity markets"]}]}],"canonical_facts":{"dc:contributor":["Sherrick, Bruce J","Robe, Michel A","Garcia, Philip"],"dc:creator":["Olson, Ryan Paul"],"dc:date":["2021-03-05T21:38:20Z","2020-12-07","2020-12"],"dc:description":["Hedging options are a common practice to reduce or specify the risk of an option position. In most institutions, it takes place daily. The hedge coefficients used are often determined by the Black Scholes option pricing model and are commonly referred to as the “greeks”. Although the flaws of the Black Scholes model are well known, the model is still extremely useful and the most commonly used approach. The hedge error is defined as the difference in the profit and loss of the option position and the hedge position. Hedging an option reduces the volatility of an option position. In practice, the volatility of the position cannot be reduced to zero. This thesis studies the remaining volatility known as hedge error. This thesis examines how moneyness and tenor affect hedge error in order to help a trader manage the hedge error. Secondly, this thesis investigates which subset of the greeks provides an optimal and economically significant reduction in volatility. Corn, lean hogs, and crude oil are the three commodities that are investigated in this thesis. The results are additionally separated into puts and calls. The results show that as an option is further out-of-the-money, the hedge error increases by an economically significant amount. Second, this research finds only marginal volatility reduction is achieved by hedging rho, interest rate risk. However, incorporating a gamma and/or vega hedge significantly reduces the volatility of the option portfolio returns.","Submission original under an indefinite embargo labeled 'Open Access'. The submission was exported from vireo on 2021-03-04 without embargo terms","The student, Ryan Olson, accepted the attached license on 2020-12-03 at 09:54.","The student, Ryan Olson, submitted this Thesis for approval on 2020-12-03 at 09:56.","This Thesis was approved for publication on 2020-12-07 at 10:08.","DSpace SAF Submission Ingestion Package generated from Vireo submission #16052 on 2021-03-04 at 15:36:05","Made available in DSpace on 2021-03-05T21:38:20Z (GMT). No. of bitstreams: 2 OLSON-THESIS-2020.pdf: 2920566 bytes, checksum: 598bccb7c85c9f840f234d25e1e498f5 (MD5) LICENSE.txt: 4207 bytes, checksum: 4a92fa0f012a75d032883ed66c1378d8 (MD5) Previous issue date: 2020-12-07"],"dc:format":["application/pdf"],"dc:identifier":["http://hdl.handle.net/2142/109434"],"dc:language":["en"],"dc:rights":["2020 by Ryan Paul Olson. All rights reserved"],"dc:subject":["Options, Hedging, Financial Engineering, Agricultural Economics"],"dc:title":["Option hedging error in commodity markets"],"dc:type":["text","Thesis"],"thesis:degree_discipline":["Agricultural & Applied Econ"],"thesis:degree_level":["Thesis"],"thesis:degree_name":["M.S."],"thesis:institution_name":["University of Illinois at Urbana-Champaign"]},"updated_at":"2026-07-22T22:24:50Z"}