IDEAS home Printed from https://ideas.repec.org/a/wsi/afexxx/v15y2020i02ns2010495220500098.html
   My bibliography  Save this article

Welfare Gains From Macro-Hedging

Author

Listed:
  • MOAWIA ALGHALITH

    (Department of Economics The University of the West Indies, St. Augustine, Trinidad and Tobago)

  • WING-KEUNG WONG

    (#x2020;Department of Finance, Asia University, Wufeng Taichung Country 41354, Taiwan, R. O. China‡Research Center of FinTech and BlockChain Technology, Asia University, Taichung Country 41354 Taiwan, R. O. China§Big Data Research Center, College of Management, Asia University, Taichung Country 41354, Taiwan, R. O. China¶Department of Medical Research, China Medical University Hospital, Taichung 40402, Taiwan, R. O. China∥Department of Economics and Finance, The Hang Seng University of Hong Kong, Shatin, East New Territories, Hong Kong)

Abstract

Macro-hedging is one of the most important issues in hedging, but there are very few studies on the welfare impact of macro-hedging. To bridge a gap in the literature of macro-hedging, this paper introduces a method that generalizes and extends existing models of macro-hedging in several significant ways. We first assume the existence of basis risk in a small country to hedge in futures markets instead of forward contracts and relax the full-hedging assumption. We use the quantity being hedged in futures contracts as a decision variable. We also relax the restrictive assumption regarding the form of the spot price. We then derive the formula to estimate the welfare gain which can be easily implemented in any empirical case. In contrast to quasi-simulation being used in some existing approaches, our proposed method can be used for any real data, including future data, but existing methods in the literature cannot. Our approach is for investors for their investment decision-making when they use macro-hedging as their trading strategy.

Suggested Citation

  • Moawia Alghalith & Wing-Keung Wong, 2020. "Welfare Gains From Macro-Hedging," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 15(02), pages 1-7, June.
    • Handle: RePEc:wsi:afexxx:v:15:y:2020:i:02:n:s2010495220500098
    DOI: 10.1142/S2010495220500098
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S2010495220500098
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1142/S2010495220500098?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:afexxx:v:15:y:2020:i:02:n:s2010495220500098. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscinet.com/afe/afe.shtml .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.