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A note on dynamic hedging

Author

Listed:
  • Moawia Alghalith
  • Christos Floros
  • Ricardo Lalloo

Abstract

Purpose - – The purpose of this paper is to empirically test dynamic hedging, using data from the FTSE-100 and Standard & Poor’s (S&P) 500 futures indices. Design/methodology/approach - – The authors introduce a dynamic continuous-time hedging model in futures markets. The authors further relax the statistical-independence assumption between the spot price and basis risk. Findings - – The authors show that the investors are, on average, quite risk averse. The authors find that a one unit increase in the price volatility reduces the hedged FTSE-100 (S&P 500) by 645.62 (777.07) units. Similarly, a one unit increase in basis risk reduces the hedged FTSE-100 (S&P 500) by 403.57 (378.54) units. The authors’ approach shows that risk-averse investors should decrease their hedge (i.e. increase their equity allocation) with an increase in index price risk. Practical implications - – These findings are helpful to risk managers dealing with futures markets. Originality/value - – The contribution of this paper is that it successfully introduces a dynamic continuous-time hedging model in futures markets.

Suggested Citation

  • Moawia Alghalith & Christos Floros & Ricardo Lalloo, 2015. "A note on dynamic hedging," Journal of Risk Finance, Emerald Group Publishing Limited, vol. 16(2), pages 190-196, March.
    • Handle: RePEc:eme:jrfpps:jrf-10-2014-0143
    DOI: 10.1108/JRF-10-2014-0143
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    More about this item

    Keywords

    Futures; Basis risk; Dynamic hedging; FTSE-100; S&P 500; D8; G1;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G1 - Financial Economics - - General Financial Markets

    Statistics

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