Open AccessHOW EFFECTIVE IS FUTURES AS AN INSTRUMENT OF HEDGING AGAINST PRICE RISK? -A STUDY BASED ON SPOT AND FUTURE PRICES OF GOLD
Author(s) -
Shafeeque Muhammad,
Thomachan
Publication year - 2016
Publication title -
international journal of research - granthaalayah
Language(s) - English
Resource type - Journals
eISSN - 2394-3629
pISSN - 2350-0530
DOI - 10.29121/granthaalayah.v4.i9.2016.2548
Subject(s) - futures contract , hedge , normal backwardation , spot contract , economics , market neutral , portfolio , position (finance) , financial economics , forward market , forward contract , futures market , econometrics , spot market , cash , commodity , finance , electricity , ecology , electrical engineering , biology , engineering
This paper examines the role of commodity futures market as an instrument of hedging against price risk. Hedging is the practice of offsetting the price risk in a cash market by taking an opposite position in the futures market. By taking a position in the futures market, which is opposite to the position held in the spot market, the producer can offset the losses in the latter with the gains in the former. Both static and time varying hedge ratios have been calculated using VECM-MGARCH model. Variance of return from hedge portfolio has been found to be low. Further hedging effectiveness has been observed to be around 12%.