The Effectiveness of Optimal Risk Reduction in Indian Futures Market
Keywords:
Optimal Hedge Ratio, Hedging, Effectiveness, National Stock Exchange of India Ltd, Equity Futures, DVEC GARCH, Variance, CovarianceAbstract
The hedge ratio compares the value of a position protected through the use of a hedge with the size of the entire position itself and hedging effectiveness is the percentage reduction in variance of the hedge portfolio to the unhedged portfolio. The present study is conducted with an objective to estimate optimal hedge ratio and hedging effectiveness of futures contracts on fifteen individual securities traded in NSE using DVEC GARCH model. Using spot returns and futures returns of the selected individual securities for the entire period of stock futures trade in India till 31st March 2018, the study reveals that Indian equity futures contracts provide hedging opportunity for all selected companies. Among the selected companies, Mahindra and Mahindra Ltd., State Bank of India Ltd. and ITC Ltd. have got highest and consistent optimal hedge ratio and hedging effectiveness providing that hedging with the stock futures of these companies provides maximum variance reduction and hedging effectiveness for the hedgers in the Indian equity futures market.
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