The Dynamic Optimal Hedge Ratio Of Foreign Exchange Futures And Its Empirical Research

At present, as the global economy integration and international trade increasing, almost each country enlarges its foreign trade of scale. At the same time, enterprises face increasing exchange risks from foreign exchange markets. Exchange fluctuation urges foreign exchange investors, imports and exports firms, banks and other business dealers to use a strategy of optimal hedge ratio for the purpose of reducing unnecessary loss and bringing down the foreign exchange risks. The appearing of foreign exchange futures perfectly satisfies the needs of these hedgers. More and more practice proves that using foreign exchange futures to hedge can signifigantly reduce the risks from foreign exchange markets to some degree.Now, the core problem is to determine optimal hedge ratio in the research of the futures hedge. It can successfully improve hedging effect by structuring appropriate models so as to reducing the risks of foreign exchange fluctuation.This paper summarizes the present studies on the futures hedge at home and abroad in brief, and then shows some shortages to be improved. On the basis of analysis above, the paper also introduces some theories about foreign exchange futures in details, and gives a general glimpse of the hedge theories and its future development tendency. This paper uses tail correlation coefficient of Archimedean Copula function instead of traditional linear correlation coefficient by introducing Kendall’s rank correlation, and then calculates the optimal hedge ratio based on Copula-GARCH model. Moreover, this paper carries on parameter estimation in brief with three kinds of hedge models:ECM-GARCH model, CCC-GARCH model and Copula-GARCH model.In the next place, it calculates the optimal hedge ratio and the hedging performance by these three models using data from foreign exchange markets such as two kinds of foreign exchange futures:Euro and GBP. Empirical results show that compare to ECM-GARCH model and CCC-GARCH model, Copula-GARCH model plays much better in the currency hedge both in the samples and out of the samples with less hedge costs, and hence can effectively succeed in avoiding the foreign exchange risks; Euro futures have lower optimal hedge ratio and fluctuation in contrast to GBP futures, so the hedgers just need less hedge costs using Euro futures, and the corresponding risk is lower as well;compare to the yield series of Euro spots and futures, the tail in yield series of GBP spots and futures is even more sensitive, and is also subjected to yield fluctuation easily.