Premium
OPTIMAL FUTURES HEDGE WITH MARKING‐TO‐MARKET AND STOCHASTIC INTEREST RATES
Author(s) -
Chang Carolyn W.,
Chang Jack S. K.,
Fang Hsing
Publication year - 1996
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1996.tb00216.x
Subject(s) - futures contract , hedge , economics , econometrics , forward market , interest rate , futures market , constant (computer programming) , basis risk , differential (mechanical device) , financial economics , index (typography) , actuarial science , monetary economics , computer science , capital asset pricing model , ecology , engineering , biology , programming language , aerospace engineering , world wide web
We investigate the effect of marking‐to‐market on an optimal futures hedge under stochastic interest rates. An intertemporal optimal hedge ratio that accounts for basis risk and marking‐to‐market is derived. This ratio includes all previous hedge ratios, with constant interest rates as special cases. In a preliminary empirical study using S&P 500 index futures contracts, we demonstrate that the futures‐forward hedging differential is nontrivial, especially in risk‐return optimization. We also show that the covariances between interest rates and spot and futures prices explain the differential: the larger the covariances are, the larger the differential will be.