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Estimation of the optimal futures hedge

Author

Listed:
  • Stephen G. Cecchetti
  • Robert E. Cumby
  • Stephen Figlewski

Abstract

Standard approaches to designing a futures hedge often suffer from two major problems. First, they focus only on minimizing risk, so no account is taken of the impact on expected return. Second , in estima ting the hedge ratio, no allowance is made for time variation in the distribution of cash and futures price changes. This paper describes a technique for estimating the optimal futures hedge that corrects these problems and illustrates its use in hedging Treasury bonds with T-bond futures. Copyright 1988 by MIT Press.
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Suggested Citation

  • Stephen G. Cecchetti & Robert E. Cumby & Stephen Figlewski, 1986. "Estimation of the optimal futures hedge," Research Working Paper 86-10, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkrw:86-10
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    Keywords

    Hedging (Finance); Futures;

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