Author(s)

Xu Guo^1,2, Donald Lien^3,4, Wing-Keung Wong^5,6,7*

¹School of Statistics, Beijing Normal University, Beijing, China.
²College of Economics and Management, Nanjing University of Aeronautics and Astronautics, Nanjing, China.
³Department of Economics, University of Texas at San Antonio, San Antonio, USA.
⁴Institute of Economics, Tsinghua University, Beijing, China.
⁵Department of Finance, Asia University, Taichung.
⁶Department of Economics, Lingnan University, Hong Kong, China.
⁷Department of Economics, Hong Kong Baptist University, Hong Kong, China.

Within the optimal production and hedging decision framework, Lien compares the exponential utility function with its second order approximation under the normality distribution assumption. In this paper, we first extend the result further by comparing the exponential utility function with a 2n-order approximation for any integer n. We then propose an approach with illustration to find the smallest n that provides a good approximation.

Exponential Utility Function, Optimal Production, Hedging, 2n-Order Approximation

Guo, X. , Lien, D. and Wong, W. (2016) Good Approximation of Exponential Utility Function for Optimal Futures Hedging. Journal of Mathematical Finance, 6, 457-463. doi: 10.4236/jmf.2016.63036.