Optimal hedging under invisible choices

Article Abstract:

The effects on hedging performance due to standardization of size specifications for futures contracts is examined and an optimal hedging model presented, including constraint of indivisible choices. Results indicate that hedging performance is reduced for small size spot positions, but sufficiently large hedging spot positions do not suffer disadvantages from fixed sizes of futures contracts. Large hedgers should be able to make use of common rounding practice without much loss, though that conclusion is not valid for measurements at the margin of hedging effectiveness differences.

Contracts, Financial futures

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A statistical model for the relationship between futures contract hedging effectiveness and investment horizon length

Article Abstract:

A statistical model for the relationship between futures contract hedging effectiveness and investment horizon length has been developed. The model is based on cointegration between spot and futures prices. It enables the estimation of hedge ratios for all arbitrary investment horizon lengths and avoids the statistical problems linked to small samples and overlapping observations.

Investment analysis, Securities analysis

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