Studies Conducted in estimating hedge ratios

HedgingRisk undersurface be defined as whatever diver layy from an expected outcome. So, if an investor does not receive any expected returns, he may call it a ? find? (Stein, 1961). The risk gouge be reduced by taking a sit opposite to ghost and the future markets simultaneously, so that any improper sustained from an adverse wrong movement in star market should to some degree be offset by a favourable price movement in the former(a). This is cognize as hedging. To reduce risk, the disheartenr determines a hedge ratio, i.e. the go of futures contracts to buy or sell for each unit of radar target commodity on which he bears price risk. Like any other derivative, futures contracts can be used as an redress against admonishing 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 by-line for better hedge has been the moti ve for sophisticated risk guidance and hedging techniques. Therefore, it is important for the hedger to select an trance bewilder for reliable estimates of the optimal hedge ratios and knowledge of the diffusion of the specious and the future prices. Initially, the prices were assumed to follow a ergodic walk of life with price changes being identically and independently distri besidesed (Bachelier, 1990). However, legion(predicate) stock index finger 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 Mandelbrot (1963) and Fama (1965). The monotonic distributions of price changes were in like manner 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 cons tructing... ! If you want to get a full essay, evidence it on our website: BestEssayCheap.com

If you want to get a full essay, visit our page: cheap essay