The Optimal Hedge Ratio To Determine The Seasonal Effects

Hedging means buying or selling the futures contracts whosequantity is suitable to the contracts in the spot market, expecting tocompensate the price risk in the spot market through selling or buying thefutures contracts at one time in future. Hedging is the reason and foundation that the futures marketproduces, one of the main types of futures exchange, and the importantmeans that realize one of the functions of the futures market --the riskshifts. Therefore, the research of the hedging theory has importanttheoretical meaning and realistic meaning. Especially in our country, it isnot long since the build-up of the futures market, and the construction ofthe corresponding system and legislation is not perfect, so it seems evenmore important to fully utilize the futures market to carry on hedging. Itnot merely means how the microeconomic subject utilizes the futuresmarket to lock the cost, stabilize the profits; it also means how thesupervisor plays a better role of " hand that can see ". The research of this thesis follows that the existence of basis riskresults in that hedging can not dispel the whole risk, in order to get theminimum risk, the persons who hedge can adjust the ratio that the futurescompare with the spot, which is named hedge ratio. It's general toestimate the risk with the fluctuation of the profits, so, the riskminimization means to minimize the variance of the profits. According tothe minimization of the variance, derive out the calculation formula of theoptimal hedge ratio, then set up suitable model and estimate each keyelement in this formula. This thesis takes the hedging of copper as an example, setting upfour kinds of models separately in order to calculate each element in theformula of hedge ratio and then determine the optimal hedge ratio. Inorder to examine whether the optimal hedge ratio have really reduced therisk, and which kind of model is more effective, the author compares thehedge results according to the different models. Because the delivery timeaffected the price and the exchange situation, the author analyzes theseasonal effect of the hedge ratio to judge if the influence can cause theoptimal hedge ratio is significantly different from each other. This thesis is divided into five chapters, the structure of everychapter and the basic contents are as follows: Chapter one --Proposition of the optimal hedge ratio This chapter introduces the birth of the futures market, the types offutures trade, the functions of the futures market, and the actualconditions of the futures market of China, putting emphasis on the valueof hedging in the futures and on the important meaning of the theoreticalresearch, and explains such basic concepts as futures, hedging, etc. It is general that hedging can really achieve the goal of reducing therisk in spot market, but the existence of basis risk results in that hedgingcan't totally dispel the risk. So the question is how to adjust the ratio offutures goods to spot goods, which is named hedge ratio, to make the riskof hedging minimum. It is general to estimate the risk with the fluctuationof the future profits. So, to minimize the risk is to minimize the varianceof the future profits. Therefore derive out the calculation formula of theoptimal hedge ratio: The two formulas are the most fundamental and the most importantformulas in this thesis. The purpose of setting up models next is toestimate the key elements in these two formulas. Chapter two -- survey of the estimation methods of the hedgeratio In this chapter, the author divides the estimation methods of hedgeratio into three stages: stage of 1, stage of constant and stage oftime-varying, and divides the chapter into four sections. The authorintroduces the three stages in the first three sections separately. Section one introduces the stage during which the hedge ratio is 1,which is the initial theory about the determination of the hedge ratio. Thetraditional hedging theory emphasizes four major principles --oppositedirection, the same kind of goods, equal quantity and the sam...