A Study On Basis Risk And Hedging Strategies

From a case study on several examples of hedging and trading activities on both domestic and oversea future markets, this paper found out the key factor for a successful hedging is to identify and fully understand the’basis risk’. Recent researchers almost neglected the importance of basis risk, but put their efforts on calculating optimal hedging ratio through hetero-skedasticity, auto correlation and other quantitative methods, and the analysis on optimization of risk, return and utility function.This paper did not see future as another related asset to spot goods, but added maturity factor to the auto correlation model of basis return. The factor made it possible to let basis shrink gradually to zero with the maturity day approaches, and the volatility also decreases. After a discussion on characteristics about basis risk, none hedging, traditional hedging, OLS, ordinary dynamic hedging, GARCH model combined with single stage hedging and multi-stage hedging was used in a empirical study. The conclusions are listed below:(1) The basis of future contract generally approaches to zero along with the maturity date arrives, and the volatility diminishes as well.(2)The GARCH model can not be applied to the hedging of Shanghai copper and aluminum future contracts, but can significantly improves the effectiveness of hedging activities for S&P500 stock index future.(3) The calculation of multi-stage hedging ratio considered about auto regression, but the MVHR is far higher than other models, and the volatility of the portfolio is rather big, thus the risk control is harder than single stage methods.(4) MVHR got from single stage hedging model without maturity effects renders least value at the start, increases along the maturity date approaches. Besides, the volatility is smaller than ordinary dynamic hedging methods and single stage hedging model with maturity effects. The model thus has higher practical value.