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Ex ante hedge ratios and the hedging effectiveness of the FTSE-100 stock index futures contract

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  • Phil Holmes

Abstract

This paper examines the hedging effectiveness of the FTSE-100 stock index futures contract over the period 1984-92. Previous studies have examined this issue using ex post hedge ratios, resulting in an overestimation of hedging performance. This study utilizes ex ante hedge ratios which are determined on the basis of historical information. It is shown that while hedge ratios vary through time, nonetheless it is possible to use this futures contract to achieve very substantial risk reduction as compared to an unhedged position. Hedge ratios estimated over longer periods are shown to provide greater risk reduction when applied in subsequent periods.

Suggested Citation

  • Phil Holmes, 1995. "Ex ante hedge ratios and the hedging effectiveness of the FTSE-100 stock index futures contract," Applied Economics Letters, Taylor & Francis Journals, vol. 2(3), pages 56-59.
    • Handle: RePEc:taf:apeclt:v:2:y:1995:i:3:p:56-59
    DOI: 10.1080/135048595357564
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    Cited by:

    1. Darren Butterworth & Phil Holmes, 2005. "The Hedging Effectiveness of U.K. Stock Index Futures Contracts Using an Extended Mean Gini Approach: Evidence for the FTSE 100 and FTSE Mid250 Contracts," Multinational Finance Journal, Multinational Finance Journal, vol. 9(3-4), pages 131-160, September.
    2. Pandey, Ajay, 2008. "Hedging Effectiveness of Constant and Time Varying Hedge Ratio in Indian Stock and Commodity Futures Markets," IIMA Working Papers WP2008-06-01, Indian Institute of Management Ahmedabad, Research and Publication Department.
    3. Abdulnasser Hatemi-J & Eduardo Roca, 2006. "Calculating the optimal hedge ratio: constant, time varying and the Kalman Filter approach," Applied Economics Letters, Taylor & Francis Journals, vol. 13(5), pages 293-299.
    4. A. D. Clare & M. C. Oozeer, 2001. "Hedging sterling eurobond portfolios: a proposal for eurobond futures contract," Applied Financial Economics, Taylor & Francis Journals, vol. 11(1), pages 37-44.
    5. Olson, Eric & Vivian, Andrew & Wohar, Mark E., 2019. "What is a better cross-hedge for energy: Equities or other commodities?," Global Finance Journal, Elsevier, vol. 42(C).
    6. Shashi Gupta & Himanshu Choudhary & D.R. Agarwal, 2017. "Hedging Efficiency of Indian Commodity Futures," Paradigm, , vol. 21(1), pages 1-20, June.
    7. Mandeep Kaur & Kapil Gupta, 2019. "Estimating Hedging Effectiveness Using Variance Reduction And Risk-Return Approaches: Evidence From National Stock Exchange Of India," Copernican Journal of Finance & Accounting, Uniwersytet Mikolaja Kopernika, vol. 8(4), pages 149-169.
    8. Zainudin, Ahmad Danial & Mohamad, Azhar, 2021. "Cross hedging with stock index futures," The Quarterly Review of Economics and Finance, Elsevier, vol. 82(C), pages 128-144.
    9. Darren Butterworth & Phil Holmes, 2001. "The hedging effectiveness of stock index futures: evidence for the FTSE-100 and FTSE-mid250 indexes traded in the UK," Applied Financial Economics, Taylor & Francis Journals, vol. 11(1), pages 57-68.
    10. Ghoddusi, Hamed & Emamzadehfard, Sahar, 2017. "Optimal hedging in the US natural gas market: The effect of maturity and cointegration," Energy Economics, Elsevier, vol. 63(C), pages 92-105.
    11. Ah-Boon Sim & Ralf Zurbruegg, 2001. "Optimal hedge ratios and alternative hedging strategies in the presence of cointegrated time-varying risks," The European Journal of Finance, Taylor & Francis Journals, vol. 7(3), pages 269-283.
    12. Gurmeet Singh, 2017. "Estimating Optimal Hedge Ratio and Hedging Effectiveness in the NSE Index Futures," Jindal Journal of Business Research, , vol. 6(2), pages 108-131, December.

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