How to hedge if the payment date is uncertain?

This paper is the first to study the hedging of price risk with uncertain payment dates, a frequent problem in practice. It derives a variance-minimizing hedging strategy for two settings, the first employing linear contracts with different times to maturity and the second allowing for non-linear exotic derivatives. Using commodity prices and exchange rates, we empirically show the optimal strategy clearly outperforms heuristic alternatives in both settings. Non-linear instruments offer advantages with increasing hedge horizons and strongly dependent time and price risk, while linear instruments can suffice for short horizons and weak dependency.