Should Investor invest in both future and spot market? : An Analysis through Optimal Hedge Ratio

Abstract

This study is to estimate optimal hedge ratio with the variables from Indian futures and spot market and also nineteen individual stock prices. Diagonal VEC-GARCH model is used for the period from June 2000 to June 2011. The Empirical results confirm that there is effective risk sharing and hedging processes in Indian futures market. It is also found that Indian futures and spot markets have strong causal relationship; which allows the trader to make perfect arbitrage process and hedge their risks.

Tackling Investment Risks Using Equity Options During Extreme Economic Upheavals: Indian Evidence

“…Further, hedge portfolios developed by incorporating any one of the options segments with the underlying equity have a risk reduction ranging from 47% to 91%. When compared with the reported effective risk reduction initiated from the Indian futures market (Gupta & Singh, 2009;Jose & Lazar, 2012;Singh, 2017), the results of the present study do not disprove the findings of Chang and Shankar (1986) and Lien and Tse (2001) that the futures contracts outperform the options in terms of hedging effectiveness. But the inherent disadvantage of the futures that it fails to assist the hedger in benefiting from favourable market movements leads to a suggestion that those investors who are desirous of mitigating the risk exposure to a great extent without any compromises in the benefits can opt for combinations of futures and options altogether to have a better hedging portfolio.…”