OPTIMAL HEDGE RATIO ESTIMATION AND HEDGING EFFECTIVENESS OF FUTURES CONTRACT

Abstract

Futures Contracts are increasingly popular derivatives in hedging. Investors and Hedgers will use the econometric models to determine the optimal hedge ratio. In order to get the right amount of contracts for portfolio size and to get the lower volatility which will lead to Maximize utility.

In this study uses the econometric models such as OLS (Ordinary Least Square) VAR (Vector Autoregressive) VECM (Vector Error Correction Model) and GARCH (Generalized Autoregressive Conditional Heteroskedasticity) to estimate the optimal hedge ratio of various Futures Contracts Futures as SET50 Index Futures GOLD Futures USD Futures ITD Futures KTB Futures and SIRI Futures by testing the hedging effectiveness of the econometric models with Futures Contracts.

The empirical result show that the VAR model with top 3 Futures Contracts; GOLD Futures ITD Futures and SET50 Index Futures provides the highest optimal hedge ratio. The OLS model provides the optimal hedge ratio is a little different from the GARCH model. However, when testing the hedging effectiveness of econometric models find that GARCH and OLS models for ITD Futures and SET50 Index Futures provide the highest hedging effectiveness approximately 94.0520% and 91.4783% respectively. Which of is follows from the theory that GARCH model should have highest the hedging effectiveness because GARCH model will a reflection of the actual news information changes over time. And the OLS model is a simple model that of use to find the optimal hedge ratio for the variance reduction and hedging.