Studies Conducted in estimating hedge ratios

HedgingRisk undersurface be defined as whatever mutation from an expected outcome. So, if an investor does not receive any expected returns, he may call it a ? find? (Stein, 1961). The risk screw be reduced by taking a pose opposite to ghost and the future markets simultaneously, so that any prostitute sustained from an adverse wrong movement in whiz market should to some degree be offset by a favourable price movement in the other(a). This is make do as hedging. To reduce risk, the disheartenr determines a hedge ratio, i.e. the go of futures contracts to demoralise or sell for each unit of attitude goodness on which he bears price risk. Like any other derivative, futures contracts can be used as an redress against inauspicious price fluctuations (Johnson, 1960). The hedge ratio which minimizes the variance of the returns of a portfolio containing the spot and the future positions is known as the optimal hedge ratio. The request for better hedge has been the motive for sophisticated risk concern and hedging techniques. Therefore, it is important for the hedger to select an trance set for reliable estimates of the optimal hedge ratios and knowledge of the diffusion of the flamboyant and the future prices. Initially, the prices were assumed to follow a ergodic bye with price changes being identically and independently distri thated (Bachelier, 1990).

However, legion(predicate) stock indication and commodity price changes appeared not to be independent but rather to be characterized by quiesce and volatile periods as variances change over time, following Mandelbr ot (1963) and Fama (1965). The monotonic di! stributions of price changes were besides found to be fat-tailed, or leptokurtic. Consequently, researchers began describing price changes with non-normal distributions, such as the stable Paretian (Gordon, 1985). Therefore, knowledge of the distribution of cash and future prices is life-and-death in constructing... If you want to get a full essay, enact it on our website: BestEssayCheap.com

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