Futures minimum variance hedge ratio determination: An ex-ante analysis

The Limits to Minimum-Variance Hedging

When market returns follow a long memory volatility process, standard approaches to estimating dynamic minimum variance hedge ratios (MVHRs) are misspecified. Simulation results and an application to the S&P 500 index document the magnitude of the misspecification that results from failure to account for basis convergence and long memory in volatility. These results have important implications for the estimation of MVHRs in the S&P 500 example and other markets as well.

Asymmetric Effect of Basis on Dynamic Futures Hedging: Empirical Evidence from Commodity Markets

European Natural Gas Seasonal Effects on Futures Hedging

The hedging performance of Canadian stock index futures, namely the now defunct TSE 300 contract and the TSE 35 currently trading on the Toronto Futures Exchange, is investigated since inception in early 1984. Results utilizing a conditional hedging strategy are compared to more naive procedures. No value added is apparent for the more complex methodology. This is probably due to the Canadian market's high degree of arbitrage efficiency and the monthly contract cycle, both in effect after the first year of trading.RésuméCette étude porte sur l'efficacité d'opérations de couverture reposant sur le marché à terme canadien sur indices boursiers depuis 1984. Mon analyse inclut le défunt contrat sur l'indice TSE 300 ainsi que son successeur, l'indice Toronto 35. Je compare des stratégies de contrepartie conditionnelles à des stratégies naïves et conclus que ces dernières affichent une performance tout aussi bonne. Il est fort possible que ce résultat soit dǔ au haut niveau d'efficacité du marché canadien ainsi qu'au cycle de maturité mensuel adopté par la bourse de Toronto un an après l'ouverture du marché.

Calibration of implied volatility for the exchange rate for the Chinese Yuan from its derivatives

Realized hedge ratio: Predictability and hedging performance

Foreign Exchange Rate Exposure of Companies under Dynamic Regret

The purpose of this study is to determine the extent to which canola (Brassica napus L. var. napus) is distinct from soybeans [Glycine max (L.) Merr.] from a marketing perspective. If the supply and demand fundamentals of canola are closely related to those affecting the soybean complex then, from a marketing standpoint, the two crops are substitutes because canola producers and merchandisers can employ marketing strategies similar to those for soybeans. The degree to which canola and soybeans are similarly affected by market fundamentals is measured here by conventional hedging effectiveness analyses. Relationships between canola prices and soybean, soybean oil, and soybean meal futures prices are estimated to determine whether soybean futures markets can be effectively used to crosshedge canola price risk [...]

This paper examines hedging effectiveness for the FTSE‐100 Stock Index futures contract from 1984 to 1992. It investigates the appropriate econometric technique to use in estimating minimum variance hedge ratios by undertaking estimations using OLS, an ECM and GARCH. Simple OLS outperforms more complex econometric techniques. Additionally, the paper examines the impact ofhedge duration and time to expiration on estimated hedge ratios and hedge ratio stability over time. It is shown that hedge ratios and hedging effectiveness increase with hedge duration, hedge ratios approach unity as expiration approaches and while hedge ratios vary over time they are stationary.

Commodity price, foreign exchange rate, and fuel oil price which directly impacts ocean freight cost significantly, are generally more volatile in this era, and the volatility for these prices fluctuates over time. This study is concerned with estimating futures hedge ratios for an importing firm which imports from the U.S. Specifically, this study develops the optimal risk-minimizing hedge ratios for the joint hedging decision for a Japanese soybean importing firm based on the monthly data. A theoretical analysis of the hedged price revenue has been constructed according to the minimum variance hedging model. The hedge ratios of a variety of hedging scenarios, including 3-way hedge, 2-way hedge, and 1-way hedge, are derived. They are determined by the variances and covariances of the unhedged importeri¯s price revenue and the returns from the soybean, heating oil, and exchange rate futures markets. Empirical results are achieved by using the conventional method and the time series techniques. The hedging effectiveness is compared by using in-sample and out-of-sample hedge periods based on two approaches: the minimum-variance reduction method and the utility-maximization method. The key results of this study are that an importing firm jointly hedge soybean price and exchange rate or jointly hedge soybean price and heating oil price can reduce more revenue risk than 3-way hedge and 1-way hedge, and the conventional method is more effective than the time series techniques. The empirical results presented make a contribution to developing an effective hedge strategy for the importing firm which imports commodities from the U.S.

Abstract: This paper derives an optimal hedging strategy for a primary producer under price, quantity and exchange rate uncertainty. In this model, it is assumed that the producer is a mean‐variance maximizer with an exponential utility function. The derived optimal hedge ratio for the commodity is proportional to the coefficient of the commodity futures prices bias in a linear regression where revenue uncertainty is the dependent variable. This ratio differs from the result that would have been obtained under price‐quantity uncertainty when revenues are significantly correlated with the exchange rate variability, thereby suggesting that the foreign exchange risk is relevant only when the commodity exposure is unhedged.The model is empirically tested using Côte‐d'Ivoire, Ghana and Nigeria as cocoa producers and the US Dollar and the French Franc as currencies of numeraire to hedge UK Pound revenues. The resulting cocoa hedge ratios range from 78 to 57 percent. For Ghana and the Côte‐d'Ivoire, there is little correlation between revenue and exchange rate variability. Therefore, the cocoa ratio is not significantly affected by the introduction of this additional source of uncertainty and the currency ratio in the joint hedge is trivial for both the dollar and the franc. Nigeria's revenues are correlated to the dollar and the cocoa ratio is de facto lowered by the currency effect in a joint cocoa‐dollar hedge.Résumé: Cet article presente un modele de couverture optimale a terme contre les risques conjoints de prix, de quantite et de change pour un producteur de matieres premieres dont l'objectif est de maximiser ses revenus. Le taux de couverture optimal est proportionnel au coeficent obtenu dans une regression simple des revenus ou le biais des prix a terme est la variable independente. Ce taux ne direre de celui obtenu dans un modele d'incertitude prix‐quantite que lorsque l'incertitude de quantite est correlee a celle de change. Ceci suggere a contrario qu'une couverture optimale du risque des prix de matieres premieres permet en meme temps de parer au risque de change.

Cross- and delta-hedges: Regression- versus price-based hedge ratios

Bank foreign exchange and interest rate risk management: simultaneous versus separate hedging strategies

The paper examines the performance of several options hedging models, namely with currency options, with crude oil options and with both currency and crude oil options, for a crude oil importing firm. We simulate the returns, calculate optimal hedge ratios and suggest a risk management strategy. The empirical results show that the models of GJR-t and EGARCH-t are respectively suitable to forecast the volatilities for WTI crude oil price and exchange rates (CNY/USD). Student-t Copula is the best fitting function to describe the dependence structure among the bivariate return series. Furthermore, by comparing the risks measured by conditional value at risk (CVaR), we suggest that the risk appetite investors can buy currency options for hedging and the risk aversion investors can buy crude oil options for hedging. It is not wise to buy both options of currency and crude oil in terms of budget.