Optimal Hedging Ratio For SHSZ300 Index

The first contract of stock index future-SHSZ300 has been gone public since April 2010 in China Financial Futures Exchange. The SHSZ300 has a profound effect for China's development of financial market since it offers a new instrument for investors to going short. From May to December, the average turnover of SHSZ300 per month had reached 1000 billion RMB, and trading volume per month accounted for almost 4% of all future products. Because investors need time to be familiar with SHSZ300, and a great need for capital also prevent the popularity of stock index futures. With the development of financial market, SHSZ300 will be transacted more actively, new stock/option index futures will go public. This paper focuses on the hedging function of stock index futures,using diverse methods to calculate the ratio of hedging purposes and test each effectiveness concluding the most proper method for China's condition. Basing on GARCH model, we test the hedging effectiveness of fifty stocks and compare it with none-hedging.We discover the hedging effectiveness is remarkable. What we have done proves to be useful for practical job.This paper is classified into five parts, the first part is introduction part which describes background and document summary.The second part displays the historical and present situation of stock index futures in the USA and HK to conclude useful experience for China's situation.The third section explores the connotation of hedging concept.The fourth portion demonstrates MVH method and econometrics used in the paper.The last part analyses the result to get proper conclusion for China's capital market..