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Hedging Effectiveness in the Index Futures Market

In: Nonlinear Financial Econometrics: Forecasting Models, Computational and Bayesian Models

Author

Listed:
  • Laurence Copeland
  • Yanhui Zhu

Abstract

In the textbook model of hedging an index, the solution to the problem is presented at its simplest. When a futures contract is available to track the index at all times, then one may use it to take a short position large enough to match the index holding one for one. More generally, if we recognize that in most cases the basis will not be continually zero, one can create a hedge in the same proportion (“the hedge ratio”) as the slope coefficient in the regression of the cash on the futures price.

Suggested Citation

  • Laurence Copeland & Yanhui Zhu, 2011. "Hedging Effectiveness in the Index Futures Market," Palgrave Macmillan Books, in: Greg N. Gregoriou & Razvan Pascalau (ed.), Nonlinear Financial Econometrics: Forecasting Models, Computational and Bayesian Models, chapter 6, pages 97-113, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-29522-3_6
    DOI: 10.1057/9780230295223_6
    as

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