Hedging with Forwards and Futures


 Neil Goodwin
 3 years ago
 Views:
Transcription
1 Hedging wih orwards and uures Hedging in mos cases is sraighforward. You plan o buy 10,000 barrels of oil in six monhs and you wish o eliminae he price risk. If you ake he buyside of a forward/fuures conrac for 10,000 barrels of oil wih a mauriy of six monhs, you can eliminae he price risk. Alernaively, you are a U dollar based firm and you have a conrac from which you will receive 500,000 yen in four monhs. You plan o sell yen and buy dollars. The exchange rae risk can be eliminae by aking he sellside of fuures conrac wih a mauriy of four monh o exchange 500,000 yen for U$ dollars a he fuures/forward rae. In each of hese examples, he price or exchange rae risk is eliminaed wih he use of a fuures conrac. The sixmonh oil fuures conrac will lock in he price of he oil and he four monh yen/u$ fuures conrac will lock in he exchange rae. A mauriy he mos likely scenario will be ha in neiher case will anyone acually ake delivery of he underlying asse. or example, in he case of he oil, a mauriy he oil hedger will buy he oil on he spo marke a  T, and close ou he fuures posiion realizing a payoff of +( T T ). The resul of he hedge is a cos of  T + ( T T ) =  T. If T > T, he posiive inflow from he fuures posiion will offse par of he cos. If T < T, hen he hedger will have o pay he difference and again he ne cos of purchasing he oil will be T. In he above examples, he hedging was one for one and he mauriy of he fuures conrac exacly mached he iming of he ransacion. Ofen imes he hedging approach is no as clear as i is in hese examples. or example, he iming of he mauriy of he available fuures conracs may no be he same as he iming of he obligaion. uppose for he 10,000 barrels of oil he only fuures conrac available was for a mauriy of eigh monhs, T. If we use his o hedge our six monhs obligaion,, in six monhs we buy he oil a he spo, , and offse he original fuures posiion by aking he sell side of he same conrac which will yield +( T ). The fuures price a ime,, will be, = e ( c y ) ( T ), This noe was prepared by Professor Rober M. Conroy. Copyrigh 003 by he Universiy of Virginia Darden chool oundaion, Charloesville, VA. All righs reserved. To order copies, send an o No par of his publicaion may be reproduced, sored in a rerieval sysem, used in a spreadshee, or ransmied in any form or by any means elecronic, mechanical, phoocopying, recording, or oherwise wihou he permission of he Darden chool oundaion.
2 where c is cos of carry and y is convenience yield 1 a ime. As such, he ne resul of buying he oil a spo and hedge a ime is + ( ) = T T + ( e ( c y ) ( T ) 1) T. The resul is ha he hedge is no perfec. I will depend on wha is he cos of carry and convenience yield a ime and he resul would be cerainly differen from he fixed cos of T ha we had when he mauriy of he fuures conrac exacly mached he obligaion. Hence, his mismach in mauriies creaes no quie he prefec hedge. The resuling difference from having an exac mach of mauriies is referred o a basis risk. A poenially more significan basis risk comes from a siuaion where an invesor mus use fuures conracs on a differen asse o hedge anoher asse. or example, airlines ofen wish o hedge heir je fuel coss. They sell ickes well in advance bu he acual cos of delivering he fligh will depend largely on he cos of je fuel on he dae of he ravel. Airlines can eliminae his risk by using fuures. However, hey face a problem in hedging je fuel. There are no fuures conracs raded on je fuel. The neares subsiue is heaing fuel oil. Thus, an airline could aemp o hedge heir fuel cos exposure using Heaing Oil fuures conracs. However, hey do face some risk ha he changes in he Heaing Oil fuures conracs will no exacly mach he changes in he price of Je uel. The difference beween he price of Je uel and he price of heaing Oil fuures a he dae ha he je fuel is purchased is also referred o as basis risk. As an example, Exhibi 1 shows he spo prices for je fuel and for heaing (fuel) oil from 1985 o 001. The price movemens are similar bu no quie he same. Heaing oil prices are lower and appear o be less volaile. Exhibi 1. Je uel vs. Heaing (uel) Oil Price per on Apr85 Apr86 Apr87 Apr88 Apr89 Apr90 Apr91 Apr9 Apr93 Apr94 Apr95 Apr96 Apr97 Apr98 Apr99 Apr00 Apr01 dae Je uel ($/on ,40 lbs.) uel Oil ($/meric onne,05lbs.) 1 Please see orward and uures noe page 7. Also Hull (5 h ediion), Chaper 3 page 60. Page
3 Hence using heaing oil fuures conracs on a oneoone basis may no provide a good hedge for je fuel. or an ideal hedge, over our ime horizon we would like he change in he fuures price o exacly mach he change in he value of he asse we wish o hedge, i.e., po = uures Exhibi shows he spo prices for je fuel and for hea oil 90day fuures and 60day fuures. Le s assume ha an airline wishes o hedge je fuel 30 days forward in ime and he only conracs available are 90day fuures conracs for heaing oil. The change in he spo price for je fuel over a monh is jus he price a he end of he monh less he price a he beginning of he monh. The change in he value of a fuures conrac is slighly differen. A 90day conrac a he beginning of he monh is a 60day conrac a he end of he monh. Hence if we use a 90day conrac o hedge for 30 days he change in he price is he difference beween he fuures price for a 60 day conrac a he end of he monh less he fuures price for 90 day conrac a he beginning of he monh. rom exhibi, i is clear ha he price changes of he spo je fuel prices and heaing oil fuures are no he same. This raises he quesion of wheher we can use a hedge raio, h, differen from 1.0 o hedge he je fuel prices or po = h uures. Bu how do we choose he bes h? The usual soluion is o choose h such ha i minimizes he following: Min h E [( h ) ]. This resuls in a value of h ha minimizes he squared differences beween he price changes. Anoher way of saing he same hing is o choose h such ha i minimizes he variance of he hedge. In choosing h, i places a big penaly on big differences beween The minimizaion can be rewrien as E [( h ) ] = E[ ] + h E[ ] h E[ ] Assuming E[ ]=0, and E[ ]=0, hen Cov = E = E [ ], [ ], (, ) = E[ ] = ρ, ubsiuing back in he original problem resuls yields [( h ) ] = + h h ρ E, Page 3
4 and. Noe ha we could have chosen a very differen objecive funcion. However, his paricular objecive funcion happens o be very convenien in a number of ways. The acual soluion 3, ĥ, o his formulaion is fairly sraighforward. ˆ =, s h ρ, where is he sandard deviaion of he spo price changes, is he sandard deviaion of he fuures price changes and ρ, is he correlaion beween he spo price changes and he fuures price changes. Exhibi 3 shows he calculaion of he opimal hedge using he hisorical daa in Exhibi. The basic saisics 4 are esimaed as follows: Means: = and = = 1 1 = = 1 andard Deviaions: ( ) = and ( ) = 1 Covariance: Cov(, ) = ( ) ( ) 1 = 1 1 = 1 Correlaion: ρ, Cov = (, ) 3 The soluion o he minimizaion problem is o ake he firs derivaive of he hedge variance wih respec o h, se i equal o zero, and solve for h. E( h ) h = 0 ( + h h ρ h hˆ = ρ, ρ, = 0, ) h = 0 4 The saisics shown below are based on he populaion. If everyhing was recalculaed on a sample basis he esimaed hedge raio would be he same. Be careful using saisical funcions in excel. You need o make sure ha he esimaes of sandard deviaions and correlaions have he same basis, populaion or sample. Page 4
5 Hedge: ˆ s h = ρ, I is also possible o esimae he opimal hedge using regression analysis. The basic equaion is = α + h ince he basic OL regression for his equaion esimaes he value of ĥ as ˆ =, s h ρ, we can use OL regression. This is he soluion o he minimizing he original objecive funcion. Hence, his is one of he reasons ha he objecive funcion of minimizing he squared differences is so appealing. Exhibi 4 shows he oupu of an Excel regression using he daa in Exhibi 3. Noe ha he resuls are he same. The opimal hedge raio 5 is This is very close o a value of 1.00, which is wha we would expec for wo very similar commodiies where he prices would end o move ogeher. I is useful o noe ha he regression analysis also provides us wih some informaion as o how good a hedge we are creaing. The rsquare 6 of he regression ells how much of he variance in he change in spo price is explained by he variance in he change of he fuures price. In his case he rsquared saisic is.443 or 44.3%. A good hedge migh resul in an rsquare value of.80. Hence, in his case, while he opimal hedge raio is close o 1.00, he hedge iself migh no be ha effecive. There is he poenial here for a lo of basis risk. Noneheless, he appropriae hedge is heaing oil fuures conracs for each on 7 of je fuel. I have one commen on he analysis presened in his secion. Here we used he price changes in he fuures conrac for Heaing Oil. Acually, for mos pracical purposes we could have used simply he changes in he spo prices of Heaing Oil o calculae he opimal hedge. I is ofen very difficul o ge a good consisen hisoric series of fuures prices. Equiy Porfolio Hedging Hedging porfolios is he same as hedging commodiies. Consider a porfolio wih a value oday of $5,345,456. We wish o hedge his porfolio using &P 500 fuures 5 I used he excel regression funcion wih as he y variable and as he x variable. 6 The rsquare of he regression is esimaed as he square of he correlaion coefficien beween and. rom exhibi 3, he correlaion coefficien is.666. quaring his yields Noe ha since we calculaed he opimal hedge raio based on price changes, he difference in he onnage beween he long on (,40 lbs.) for je fuel and he meric onne for heaing oil was accouned for in he analysis. Page 5
6 conracs. While our porfolio is similar o he &P 500, i is no he same. If we follow wha we did above, he opimal hedge is h ˆ P = ρ p, & P. & P or equiy porfolios he opimal hedge is in erms of reurns. or example, assume we have a porfolio wih a curren value of $10, 968,000. You wish o use &P 500 fuures conracs o hedge he risk over he nex monh. Exhibi 5 shows he monhly values for he porfolio and he index for he las four years. In his case, insead of using price changes we will calculae he opimal hedge raio using monhly reurns 8. rom exhibi 5, he opimal hedge raio is Exhibi 6 shows he esimae of he hedge raio using regression analysis. Noe ha he regression model is R = α + β. P R & P This regression model is also a way o esimae Bea for a porfolio using he &P 500 porfolio as a proxy for he marke porfolio. Hence, in his conex one inerpreaion of he opimal hedge raio is Bea. ince he $ value of each &P 500 fuures conrac is he index value imes $50, he acual number of &P 500 fuures conracs o be wrien is deermined by aking he hedge raio imes he raio of he porfolio $ value divided by he curren value of he index underlying he fuures conrac, he &P 500 in his case. or he example, Number of Conracs 9 = approximaely conracs. $10,968,000 h ˆ = =.16 conracs or ( $50) 8 We use monhly reurns because he scale differences in he value of he porfolio and he value of he index. This much easier o scale each of he series and use reurns. 9 ince we calculaed he hedge raio using percenage reurns, he hedge raio does no accoun for he size differenial beween he porfolio and he index. Hence we need o ake his ino accoun when we esimae he number of conracs required. Page 6
7 Exhibi Je uel and Heaing Oil uures Prices Je uel $/on ,40 lbs. uel Oil 90 day fuures $/meric onne,05lbs. uel Oil 60 day fuures $/meric onne,05lbs. Je uel $/on ,40 lbs. uel Oil uures $/meric onne,05lbs. Price Price Price Price Change Price Change** Jun Jul Aug ep Oc Nov Dec Jan eb Mar Apr May Jun Jul Aug ep Oc Nov Dec Jan eb Mar Apr May Jun Jul Aug ep Oc Nov Dec Jan eb Mar Apr May Jun Jul Aug ep Oc Nov Dec Jan eb Mar Apr May Jun ** Price change for fuures compares he 60 day price a ime o he 90 day price in ime 1. Page 7
8 Exhibi 3 Opimal Hedge Raio Je uel and Heaing Oil uures Prices uel Oil Je uel uures $/on ,40 lbs. $/meric onne,05lbs. Price Change Price Change** (PJMJ)(PHMH) Jun97 Jul Aug (1.31) ep (38.) Oc Nov Dec Jan eb Mar (50.71) Apr May Jun Jul (5.85) Aug ep Oc Nov Dec Jan eb Mar Apr May Jun Jul Aug ep Oc Nov (.75) Dec Jan (353.68) eb (18.57) Mar (0.50) Apr (8.18) May Jun Jul Aug ep , Oc Nov Dec (0.8) Jan ,91.39 eb (11.1) Mar Apr May Jun (13.6) Mean andard Deviaion Covariance Correlaion Hedge Page 8
9 Exhibi 4 Opimal Hedge Raio Using Regression Analysis UMMARY OUTPUT Regression aisics Muliple R R quare Adjused R quare andard Error Observaions ANOVA Df M ignificance Regression E07 Residual Toal Coefficiens andard Error a Pvalue Lower 95% Upper 95% Lower 95.0% Upper 95.0% Inercep X Variable E Page 9
10 Exhibi 5 Equiy Porfolio Hedging Porfolio &P 500 Porfolio &P 500 Reurn index Monhly reurn Monhly reurn (RpMP)*(Rs&pMs&p) Jan99 $ 9,78, eb99 9,34, Mar99 8,789, Apr99 8,957, May99 10,000, Jun99 10,044, Jul99 10,530, Aug99 10,39, ep99 9,96, Oc99 9,574, Nov99 9,649, Dec99 9,859, Jan00 10,105, eb00 9,960, Mar00 9,90, Apr00 10,615, May00 10,793, Jun00 10,700, Jul00 10,88, Aug00 10,835, ep00 11,678, Oc00 11,198, Nov00 11,80, Dec00 10,706, Jan01 11,47, eb01 1,363, Mar01 11,709, Apr01 10,87, May01 1,, Jun01 1,638, Jul01 1,8, Aug01 1,343, ep01 11,79, Oc01 9,949, Nov01 10,95, Dec01 11,739, Jan0 1,471, eb0 1,99, Mar0 1,356, Apr0 13,085, May0 1,896, Jun0 1,168, Jul0 11,80, Aug0 10,007, ep0 10,7, Oc0 9,407, Nov0 10,080, Dec0 10,968, Mean and. Deviaion Covariance Correlaion Hedge (Bea) Page 10
11 Exhibi 6 Regression Resuls for Equiy Porfolio Hedging Regression aisics Muliple R R quare Adjused R quare andard Error Observaions 47 ANOVA df M ignificance Regression E15 Residual Toal andard Upper Lower Upper Coefficiens Error a Pvalue Lower 95% 95% 95.0% 95.0% Inercep Bea Page 11
Duration and Convexity ( ) 20 = Bond B has a maturity of 5 years and also has a required rate of return of 10%. Its price is $613.
Graduae School of Business Adminisraion Universiy of Virginia UVAF38 Duraion and Convexiy he price of a bond is a funcion of he promised paymens and he marke required rae of reurn. Since he promised
More informationMorningstar Investor Return
Morningsar Invesor Reurn Morningsar Mehodology Paper Augus 31, 2010 2010 Morningsar, Inc. All righs reserved. The informaion in his documen is he propery of Morningsar, Inc. Reproducion or ranscripion
More informationChapter 8: Regression with Lagged Explanatory Variables
Chaper 8: Regression wih Lagged Explanaory Variables Time series daa: Y for =1,..,T End goal: Regression model relaing a dependen variable o explanaory variables. Wih ime series new issues arise: 1. One
More informationPROFIT TEST MODELLING IN LIFE ASSURANCE USING SPREADSHEETS PART ONE
Profi Tes Modelling in Life Assurance Using Spreadshees PROFIT TEST MODELLING IN LIFE ASSURANCE USING SPREADSHEETS PART ONE Erik Alm Peer Millingon 2004 Profi Tes Modelling in Life Assurance Using Spreadshees
More informationPrincipal components of stock market dynamics. Methodology and applications in brief (to be updated ) Andrei Bouzaev, bouzaev@ya.
Principal componens of sock marke dynamics Mehodology and applicaions in brief o be updaed Andrei Bouzaev, bouzaev@ya.ru Why principal componens are needed Objecives undersand he evidence of more han one
More informationMarkit Excess Return Credit Indices Guide for price based indices
Marki Excess Reurn Credi Indices Guide for price based indices Sepember 2011 Marki Excess Reurn Credi Indices Guide for price based indices Conens Inroducion...3 Index Calculaion Mehodology...4 Semiannual
More informationWHAT ARE OPTION CONTRACTS?
WHAT ARE OTION CONTRACTS? By rof. Ashok anekar An oion conrac is a derivaive which gives he righ o he holder of he conrac o do 'Somehing' bu wihou he obligaion o do ha 'Somehing'. The 'Somehing' can be
More informationEstimating TimeVarying Equity Risk Premium The Japanese Stock Market 19802012
Norhfield Asia Research Seminar Hong Kong, November 19, 2013 Esimaing TimeVarying Equiy Risk Premium The Japanese Sock Marke 19802012 Ibboson Associaes Japan Presiden Kasunari Yamaguchi, PhD/CFA/CMA
More informationI. Basic Concepts (Ch. 14)
(Ch. 14) A. Real vs. Financial Asses (Ch 1.2) Real asses (buildings, machinery, ec.) appear on he asse side of he balance shee. Financial asses (bonds, socks) appear on boh sides of he balance shee. Creaing
More informationChapter 7. Response of FirstOrder RL and RC Circuits
Chaper 7. esponse of FirsOrder L and C Circuis 7.1. The Naural esponse of an L Circui 7.2. The Naural esponse of an C Circui 7.3. The ep esponse of L and C Circuis 7.4. A General oluion for ep and Naural
More informationRisk Modelling of Collateralised Lending
Risk Modelling of Collaeralised Lending Dae: 4112008 Number: 8/18 Inroducion This noe explains how i is possible o handle collaeralised lending wihin Risk Conroller. The approach draws on he faciliies
More informationINTEREST RATE FUTURES AND THEIR OPTIONS: SOME PRICING APPROACHES
INTEREST RATE FUTURES AND THEIR OPTIONS: SOME PRICING APPROACHES OPENGAMMA QUANTITATIVE RESEARCH Absrac. Exchangeraded ineres rae fuures and heir opions are described. The fuure opions include hose paying
More informationWhy Did the Demand for Cash Decrease Recently in Korea?
Why Did he Demand for Cash Decrease Recenly in Korea? Byoung Hark Yoo Bank of Korea 26. 5 Absrac We explores why cash demand have decreased recenly in Korea. The raio of cash o consumpion fell o 4.7% in
More informationTerm Structure of Prices of Asian Options
Term Srucure of Prices of Asian Opions Jirô Akahori, Tsuomu Mikami, Kenji Yasuomi and Teruo Yokoa Dep. of Mahemaical Sciences, Risumeikan Universiy 111 Nojihigashi, Kusasu, Shiga 5258577, Japan Email:
More informationWhat is a swap? A swap is a contract between two counterparties who agree to exchange a stream of payments over an agreed period of several years.
Currency swaps Wha is a swap? A swap is a conrac beween wo counerparies who agree o exchange a sream of paymens over an agreed period of several years. Types of swap equiy swaps (or equiyindexlinked
More informationCredit Index Options: the noarmageddon pricing measure and the role of correlation after the subprime crisis
Second Conference on The Mahemaics of Credi Risk, Princeon May 2324, 2008 Credi Index Opions: he noarmageddon pricing measure and he role of correlaion afer he subprime crisis Damiano Brigo  Join work
More information4. International Parity Conditions
4. Inernaional ariy ondiions 4.1 urchasing ower ariy he urchasing ower ariy ( heory is one of he early heories of exchange rae deerminaion. his heory is based on he concep ha he demand for a counry's currency
More informationStock Trading with Recurrent Reinforcement Learning (RRL) CS229 Application Project Gabriel Molina, SUID 5055783
Sock raing wih Recurren Reinforcemen Learning (RRL) CS9 Applicaion Projec Gabriel Molina, SUID 555783 I. INRODUCION One relaively new approach o financial raing is o use machine learning algorihms o preic
More informationIndividual Health Insurance April 30, 2008 Pages 167170
Individual Healh Insurance April 30, 2008 Pages 167170 We have received feedback ha his secion of he e is confusing because some of he defined noaion is inconsisen wih comparable life insurance reserve
More informationNikkei Stock Average Volatility Index Realtime Version Index Guidebook
Nikkei Sock Average Volailiy Index Realime Version Index Guidebook Nikkei Inc. Wih he modificaion of he mehodology of he Nikkei Sock Average Volailiy Index as Nikkei Inc. (Nikkei) sars calculaing and
More informationSHB Gas Oil. Index Rules v1.3 Version as of 1 January 2013
SHB Gas Oil Index Rules v1.3 Version as of 1 January 2013 1. Index Descripions The SHB Gasoil index (he Index ) measures he reurn from changes in he price of fuures conracs, which are rolled on a regular
More informationJournal Of Business & Economics Research September 2005 Volume 3, Number 9
Opion Pricing And Mone Carlo Simulaions George M. Jabbour, (Email: jabbour@gwu.edu), George Washingon Universiy YiKang Liu, (yikang@gwu.edu), George Washingon Universiy ABSTRACT The advanage of Mone Carlo
More informationEquities: Positions and Portfolio Returns
Foundaions of Finance: Equiies: osiions and orfolio Reurns rof. Alex Shapiro Lecure oes 4b Equiies: osiions and orfolio Reurns I. Readings and Suggesed racice roblems II. Sock Transacions Involving Credi
More informationOption PutCall Parity Relations When the Underlying Security Pays Dividends
Inernaional Journal of Business and conomics, 26, Vol. 5, No. 3, 22523 Opion Puall Pariy Relaions When he Underlying Securiy Pays Dividends Weiyu Guo Deparmen of Finance, Universiy of Nebraska Omaha,
More informationBALANCE OF PAYMENTS. First quarter 2008. Balance of payments
BALANCE OF PAYMENTS DATE: 20080530 PUBLISHER: Balance of Paymens and Financial Markes (BFM) Lena Finn + 46 8 506 944 09, lena.finn@scb.se Camilla Bergeling +46 8 506 942 06, camilla.bergeling@scb.se
More informationFORWARD AND FUTURES CONTRACTS
Page1 C H A P T E R 2 FORWARD AND FUTURES CONTRACTS 2.1 INTRODUCTION The main purpose of forward and fuures conracs is he managemen of risk. The exposure o risk as a resul of ransacing in he spo marke
More informationConceptually calculating what a 110 OTM call option should be worth if the present price of the stock is 100...
Normal (Gaussian) Disribuion Probabiliy De ensiy 0.5 0. 0.5 0. 0.05 0. 0.9 0.8 0.7 0.6? 0.5 0.4 0.3 0. 0. 0 3.6 5. 6.8 8.4 0.6 3. 4.8 6.4 8 The BlackScholes Shl Ml Moel... pricing opions an calculaing
More informationLEASING VERSUSBUYING
LEASNG VERSUSBUYNG Conribued by James D. Blum and LeRoy D. Brooks Assisan Professors of Business Adminisraion Deparmen of Business Adminisraion Universiy of Delaware Newark, Delaware The auhors discuss
More informationThe Time Value of Money
THE TIME VALUE OF MONEY CALCULATING PRESENT AND FUTURE VALUES Fuure Value: FV = PV 0 ( + r) Presen Value: PV 0 = FV  ( + r) THE EFFECTS OF COMPOUNDING The effecs/benefis
More informationNASDAQ100 Futures Index SM Methodology
NASDAQ100 Fuures Index SM Mehodology Index Descripion The NASDAQ100 Fuures Index (The Fuures Index ) is designed o rack he performance of a hypoheical porfolio holding he CME NASDAQ100 Emini Index
More informationVector Autoregressions (VARs): Operational Perspectives
Vecor Auoregressions (VARs): Operaional Perspecives Primary Source: Sock, James H., and Mark W. Wason, Vecor Auoregressions, Journal of Economic Perspecives, Vol. 15 No. 4 (Fall 2001), 101115. Macroeconomericians
More informationTable of contents Chapter 1 Interest rates and factors Chapter 2 Level annuities Chapter 3 Varying annuities
Table of conens Chaper 1 Ineres raes and facors 1 1.1 Ineres 2 1.2 Simple ineres 4 1.3 Compound ineres 6 1.4 Accumulaed value 10 1.5 Presen value 11 1.6 Rae of discoun 13 1.7 Consan force of ineres 17
More informationInductance and Transient Circuits
Chaper H Inducance and Transien Circuis Blinn College  Physics 2426  Terry Honan As a consequence of Faraday's law a changing curren hrough one coil induces an EMF in anoher coil; his is known as muual
More informationEconomics Honors Exam 2008 Solutions Question 5
Economics Honors Exam 2008 Soluions Quesion 5 (a) (2 poins) Oupu can be decomposed as Y = C + I + G. And we can solve for i by subsiuing in equaions given in he quesion, Y = C + I + G = c 0 + c Y D + I
More informationYEN FUTURES: EXAMINING HEDGING EFFECTIVENESS BIAS AND CROSSCURRENCY HEDGING RESULTS ROBERT T. DAIGLER FLORIDA INTERNATIONAL UNIVERSITY SUBMITTED FOR
YEN FUTURES: EXAMINING HEDGING EFFECTIVENESS BIAS AND CROSSCURRENCY HEDGING RESULTS ROBERT T. DAIGLER FLORIDA INTERNATIONAL UNIVERSITY SUBMITTED FOR THE FIRST ANNUAL PACIFICBASIN FINANCE CONFERENCE The
More informationPricing FixedIncome Derivaives wih he ForwardRisk Adjused Measure Jesper Lund Deparmen of Finance he Aarhus School of Business DK8 Aarhus V, Denmark Email: jel@hha.dk Homepage: www.hha.dk/~jel/ Firs
More informationA Note on Using the Svensson procedure to estimate the risk free rate in corporate valuation
A Noe on Using he Svensson procedure o esimae he risk free rae in corporae valuaion By Sven Arnold, Alexander Lahmann and Bernhard Schwezler Ocober 2011 1. The risk free ineres rae in corporae valuaion
More informationDELTAGAMMATHETA HEDGING OF CRUDE OIL ASIAN OPTIONS
ACA UNIVERSIAIS AGRICULURAE E SILVICULURAE MENDELIANAE BRUNENSIS Volume 63 04 Number 6, 05 hp://dx.doi.org/0.8/acaun056306897 DELAGAMMAHEA HEDGING OF CRUDE OIL ASIAN OPIONS Juraj Hruška Deparmen of Finance,
More information11/6/2013. Chapter 14: Dynamic ADAS. Introduction. Introduction. Keeping track of time. The model s elements
Inroducion Chaper 14: Dynamic DS dynamic model of aggregae and aggregae supply gives us more insigh ino how he economy works in he shor run. I is a simplified version of a DSGE model, used in cuingedge
More informationBALANCE OF PAYMENTS AND FINANCIAL MA REPORT 2015. All officiell statistik finns på: www.scb.se Statistikservice: tfn 08506 948 01
RKET BALANCE OF PAYMENTS AND FINANCIAL MA REPORT 2015 All officiell saisik finns på: www.scb.se Saisikservice: fn 08506 948 01 All official saisics can be found a: www.scb.se Saisics service, phone +46
More informationEquity Correlation Trading. Silverio Foresi and Adrien Vesval Goldman Sachs NYU, April 2006
Equiy Correlaion Trading Silverio Foresi and Adrien Vesval Goldman Sachs NYU, April 2006 Ouline Equiy Correlaion: Definiions, Producs and Trade Srucures Raionale: Evidence and Models Opporuniies: an Hisorical
More informationDescription of the CBOE S&P 500 BuyWrite Index (BXM SM )
Descripion of he CBOE S&P 500 BuyWrie Index (BXM SM ) Inroducion. The CBOE S&P 500 BuyWrie Index (BXM) is a benchmark index designed o rack he performance of a hypoheical buywrie sraegy on he S&P 500
More informationImpact of scripless trading on business practices of Subbrokers.
Impac of scripless rading on business pracices of Subbrokers. For furher deails, please conac: Mr. T. Koshy Vice Presiden Naional Securiies Deposiory Ld. Tradeworld, 5 h Floor, Kamala Mills Compound,
More informationModeling VXX. First Version: June 2014 This Version: 13 September 2014
Modeling VXX Sebasian A. Gehricke Deparmen of Accounancy and Finance Oago Business School, Universiy of Oago Dunedin 9054, New Zealand Email: sebasian.gehricke@posgrad.oago.ac.nz Jin E. Zhang Deparmen
More informationDoes Option Trading Have a Pervasive Impact on Underlying Stock Prices? *
Does Opion Trading Have a Pervasive Impac on Underlying Sock Prices? * Neil D. Pearson Universiy of Illinois a UrbanaChampaign Allen M. Poeshman Universiy of Illinois a UrbanaChampaign Joshua Whie Universiy
More informationSupplementary Appendix for Depression Babies: Do Macroeconomic Experiences Affect RiskTaking?
Supplemenary Appendix for Depression Babies: Do Macroeconomic Experiences Affec RiskTaking? Ulrike Malmendier UC Berkeley and NBER Sefan Nagel Sanford Universiy and NBER Sepember 2009 A. Deails on SCF
More information2.5 Life tables, force of mortality and standard life insurance products
Soluions 5 BS4a Acuarial Science Oford MT 212 33 2.5 Life ables, force of moraliy and sandard life insurance producs 1. (i) n m q represens he probabiliy of deah of a life currenly aged beween ages + n
More informationForecasting, Ordering and Stock Holding for Erratic Demand
ISF 2002 23 rd o 26 h June 2002 Forecasing, Ordering and Sock Holding for Erraic Demand Andrew Eaves Lancaser Universiy / Andalus Soluions Limied Inroducion Erraic and slowmoving demand Demand classificaion
More informationThe Greek financial crisis: growing imbalances and sovereign spreads. Heather D. Gibson, Stephan G. Hall and George S. Tavlas
The Greek financial crisis: growing imbalances and sovereign spreads Heaher D. Gibson, Sephan G. Hall and George S. Tavlas The enry The enry of Greece ino he Eurozone in 2001 produced a dividend in he
More informationThe naive method discussed in Lecture 1 uses the most recent observations to forecast future values. That is, Y ˆ t + 1
Business Condiions & Forecasing Exponenial Smoohing LECTURE 2 MOVING AVERAGES AND EXPONENTIAL SMOOTHING OVERVIEW This lecure inroduces imeseries smoohing forecasing mehods. Various models are discussed,
More informationThe yield curve, and spot and forward interest rates Moorad Choudhry
he yield curve, and spo and forward ineres raes Moorad Choudhry In his primer we consider he zerocoupon or spo ineres rae and he forward rae. We also look a he yield curve. Invesors consider a bond yield
More informationUsefulness of the Forward Curve in Forecasting Oil Prices
Usefulness of he Forward Curve in Forecasing Oil Prices Akira Yanagisawa Leader Energy Demand, Supply and Forecas Analysis Group The Energy Daa and Modelling Cener Summary When people analyse oil prices,
More informationThe Transport Equation
The Transpor Equaion Consider a fluid, flowing wih velociy, V, in a hin sraigh ube whose cross secion will be denoed by A. Suppose he fluid conains a conaminan whose concenraion a posiion a ime will be
More informationINTRODUCTION TO FORECASTING
INTRODUCTION TO FORECASTING INTRODUCTION: Wha is a forecas? Why do managers need o forecas? A forecas is an esimae of uncerain fuure evens (lierally, o "cas forward" by exrapolaing from pas and curren
More informationLecture Note on the Real Exchange Rate
Lecure Noe on he Real Exchange Rae Barry W. Ickes Fall 2004 0.1 Inroducion The real exchange rae is he criical variable (along wih he rae of ineres) in deermining he capial accoun. As we shall see, his
More informationDistributing Human Resources among Software Development Projects 1
Disribuing Human Resources among Sofware Developmen Proecs Macario Polo, María Dolores Maeos, Mario Piaini and rancisco Ruiz Summary This paper presens a mehod for esimaing he disribuion of human resources
More informationChapter 9 Bond Prices and Yield
Chaper 9 Bond Prices and Yield Deb Classes: Paymen ype A securiy obligaing issuer o pay ineress and principal o he holder on specified daes, Coupon rae or ineres rae, e.g. 4%, 5 3/4%, ec. Face, par value
More informationChapter 4: Exponential and Logarithmic Functions
Chaper 4: Eponenial and Logarihmic Funcions Secion 4.1 Eponenial Funcions... 15 Secion 4. Graphs of Eponenial Funcions... 3 Secion 4.3 Logarihmic Funcions... 4 Secion 4.4 Logarihmic Properies... 53 Secion
More informationPresent Value Methodology
Presen Value Mehodology Econ 422 Invesmen, Capial & Finance Universiy of Washingon Eric Zivo Las updaed: April 11, 2010 Presen Value Concep Wealh in Fisher Model: W = Y 0 + Y 1 /(1+r) The consumer/producer
More informationDefault Risk in Equity Returns
Defaul Risk in Equiy Reurns MRI VSSLOU and YUHNG XING * BSTRCT This is he firs sudy ha uses Meron s (1974) opion pricing model o compue defaul measures for individual firms and assess he effec of defaul
More informationDo Futures Lead Price Discovery in Electronic Foreign Exchange Markets?
Do Fuures Lead Price Discovery in Elecronic Foreign Exchange Markes? Juan Cabrera Tao Wang Jian Yang Juan Cabrera is a Ph.D. candidae in he Deparmen of Economics a he Graduae School of he Ciy Universiy
More informationStochastic Volatility Models: Considerations for the Lay Actuary 1. Abstract
Sochasic Volailiy Models: Consideraions for he Lay Acuary 1 Phil Jouber Coomaren Vencaasawmy (Presened o he Finance & Invesmen Conference, 191 June 005) Absrac Sochasic models for asse prices processes
More informationThe Interest Rate Risk of Mortgage Loan Portfolio of Banks
The Ineres Rae Risk of Morgage Loan Porfolio of Banks A Case Sudy of he Hong Kong Marke Jim Wong Hong Kong Moneary Auhoriy Paper presened a he Exper Forum on Advanced Techniques on Sress Tesing: Applicaions
More informationPrice elasticity of demand for crude oil: estimates for 23 countries
Price elasiciy of demand for crude oil: esimaes for 23 counries John C.B. Cooper Absrac This paper uses a muliple regression model derived from an adapaion of Nerlove s parial adjusmen model o esimae boh
More informationSPEC model selection algorithm for ARCH models: an options pricing evaluation framework
Applied Financial Economics Leers, 2008, 4, 419 423 SEC model selecion algorihm for ARCH models: an opions pricing evaluaion framework Savros Degiannakis a, * and Evdokia Xekalaki a,b a Deparmen of Saisics,
More informationPredicting Implied Volatility in the Commodity Futures Options Markets
Predicing Implied Volailiy in he Commodiy Fuures Opions Markes By Sephen Ferris* Deparmen of Finance College of Business Universiy of Missouri  Columbia Columbia, MO 65211 Phone: 5738829905 Email: ferris@missouri.edu
More informationGUIDE GOVERNING SMI RISK CONTROL INDICES
GUIDE GOVERNING SMI RISK CONTROL IND ICES SIX Swiss Exchange Ld 04/2012 i C O N T E N T S 1. Index srucure... 1 1.1 Concep... 1 1.2 General principles... 1 1.3 Index Commission... 1 1.4 Review of index
More informationChapter 1.6 Financial Management
Chaper 1.6 Financial Managemen Par I: Objecive ype quesions and answers 1. Simple pay back period is equal o: a) Raio of Firs cos/ne yearly savings b) Raio of Annual gross cash flow/capial cos n c) = (1
More informationForeign Exchange and Quantos
IEOR E4707: Financial Engineering: ConinuousTime Models Fall 2010 c 2010 by Marin Haugh Foreign Exchange and Quanos These noes consider foreign exchange markes and he pricing of derivaive securiies in
More informationCHARGE AND DISCHARGE OF A CAPACITOR
REFERENCES RC Circuis: Elecrical Insrumens: Mos Inroducory Physics exs (e.g. A. Halliday and Resnick, Physics ; M. Sernheim and J. Kane, General Physics.) This Laboraory Manual: Commonly Used Insrumens:
More informationNew facts in finance. John H. Cochrane
New facs in finance John H. Cochrane Inroducion and summary The las 15 years have seen a revoluion in he way financial economiss undersand he invesmen world. We once hough ha sock and bond reurns were
More informationChapter 2 Problems. 3600s = 25m / s d = s t = 25m / s 0.5s = 12.5m. Δx = x(4) x(0) =12m 0m =12m
Chaper 2 Problems 2.1 During a hard sneeze, your eyes migh shu for 0.5s. If you are driving a car a 90km/h during such a sneeze, how far does he car move during ha ime s = 90km 1000m h 1km 1h 3600s = 25m
More informationTHE PERFORMANCE OF OPTION PRICING MODELS ON HEDGING EXOTIC OPTIONS
HE PERFORMANE OF OPION PRIING MODEL ON HEDGING EXOI OPION Firs Draf: May 5 003 his Version Oc. 30 003 ommens are welcome Absrac his paper examines he empirical performance of various opion pricing models
More informationTHE FIRM'S INVESTMENT DECISION UNDER CERTAINTY: CAPITAL BUDGETING AND RANKING OF NEW INVESTMENT PROJECTS
VII. THE FIRM'S INVESTMENT DECISION UNDER CERTAINTY: CAPITAL BUDGETING AND RANKING OF NEW INVESTMENT PROJECTS The mos imporan decisions for a firm's managemen are is invesmen decisions. While i is surely
More informationChapter 6 Interest Rates and Bond Valuation
Chaper 6 Ineres Raes and Bond Valuaion Definiion and Descripion of Bonds Longerm debloosely, bonds wih a mauriy of one year or more Shorerm debless han a year o mauriy, also called unfunded deb Bondsricly
More informationCLASSIFICATION OF REINSURANCE IN LIFE INSURANCE
CLASSIFICATION OF REINSURANCE IN LIFE INSURANCE Kaarína Sakálová 1. Classificaions of reinsurance There are many differen ways in which reinsurance may be classified or disinguished. We will discuss briefly
More informationOptions and Volatility
Opions and Volailiy Peer A. Abken and Saika Nandi Abken and Nandi are senior economiss in he financial secion of he Alana Fed s research deparmen. V olailiy is a measure of he dispersion of an asse price
More informationSmall and Large Trades Around Earnings Announcements: Does Trading Behavior Explain PostEarningsAnnouncement Drift?
Small and Large Trades Around Earnings Announcemens: Does Trading Behavior Explain PosEarningsAnnouncemen Drif? Devin Shanhikumar * Firs Draf: Ocober, 2002 This Version: Augus 19, 2004 Absrac This paper
More informationThe Grantor Retained Annuity Trust (GRAT)
WEALTH ADVISORY Esae Planning Sraegies for closelyheld, family businesses The Granor Reained Annuiy Trus (GRAT) An efficien wealh ransfer sraegy, paricularly in a low ineres rae environmen Family business
More informationA Tale of Two Indices
PEER CARR is he direcor of he Quaniaive Finance Research group a Bloomberg LP and he direcor of he Masers in Mahemaical Finance program a he Couran Insiue of New York Universiy NY. pcarr4@bloomberg.com
More informationABSTRACT KEYWORDS. Term structure, duration, uncertain cash flow, variable rates of return JEL codes: C33, E43 1. INTRODUCTION
THE VALUATION AND HEDGING OF VARIABLE RATE SAVINGS ACCOUNTS BY FRANK DE JONG 1 AND JACCO WIELHOUWER ABSTRACT Variable rae savings accouns have wo main feaures. The ineres rae paid on he accoun is variable
More informationDYNAMIC MODELS FOR VALUATION OF WRONGFUL DEATH PAYMENTS
DYNAMIC MODELS FOR VALUATION OF WRONGFUL DEATH PAYMENTS Hong Mao, Shanghai Second Polyechnic Universiy Krzyszof M. Osaszewski, Illinois Sae Universiy Youyu Zhang, Fudan Universiy ABSTRACT Liigaion, exper
More informationCointegration: The Engle and Granger approach
Coinegraion: The Engle and Granger approach Inroducion Generally one would find mos of he economic variables o be nonsaionary I(1) variables. Hence, any equilibrium heories ha involve hese variables require
More informationDO FUNDS FOLLOW POSTEARNINGS ANNOUNCEMENT DRIFT? RACT. Abstract
DO FUNDS FOLLOW POSTEARNINGS ANNOUNCEMENT DRIFT? Ali Coskun Bogazici Universiy Umi G. Gurun Universiy of Texas a Dallas RACT Ocober 2011 Absrac We show ha acively managed U.S. hedge funds, on average,
More informationS&P GSCI Crude Oil Covered Call Index Methodology
S&P GSCI Crude Oil Covered Call Index Mehodology July 2014 S&P Dow Jones Indices: Index Mehodology Table of Conens Inroducion 3 Highlighs 3 The S&P GSCI Crude Oil Covered Call Index Mehodology 3 Definiions
More information1 HALFLIFE EQUATIONS
R.L. Hanna Page HALFLIFE EQUATIONS The basic equaion ; he saring poin ; : wrien for ime: x / where fracion of original maerial and / number of halflives, and / log / o calculae he age (# ears): age (halflife)
More informationChapter 6: Business Valuation (Income Approach)
Chaper 6: Business Valuaion (Income Approach) Cash flow deerminaion is one of he mos criical elemens o a business valuaion. Everyhing may be secondary. If cash flow is high, hen he value is high; if he
More informationThe stock index futures hedge ratio with structural changes
Invesmen Managemen and Financial Innovaions Volume 11 Issue 1 2014 PoKai Huang (Taiwan) The sock index fuures hedge raio wih srucural changes Absrac This paper esimaes he opimal sock index fuures hedge
More informationAcceleration Lab Teacher s Guide
Acceleraion Lab Teacher s Guide Objecives:. Use graphs of disance vs. ime and velociy vs. ime o find acceleraion of a oy car.. Observe he relaionship beween he angle of an inclined plane and he acceleraion
More informationSURVEYING THE RELATIONSHIP BETWEEN STOCK MARKET MAKER AND LIQUIDITY IN TEHRAN STOCK EXCHANGE COMPANIES
Inernaional Journal of Accouning Research Vol., No. 7, 4 SURVEYING THE RELATIONSHIP BETWEEN STOCK MARKET MAKER AND LIQUIDITY IN TEHRAN STOCK EXCHANGE COMPANIES Mohammad Ebrahimi Erdi, Dr. Azim Aslani,
More informationWorking Paper No. 482. Net Intergenerational Transfers from an Increase in Social Security Benefits
Working Paper No. 482 Ne Inergeneraional Transfers from an Increase in Social Securiy Benefis By Li Gan Texas A&M and NBER Guan Gong Shanghai Universiy of Finance and Economics Michael Hurd RAND Corporaion
More informationForecasting Sales: A Model and Some Evidence from the Retail Industry. Russell Lundholm Sarah McVay Taylor Randall
Forecasing Sales: A odel and Some Evidence from he eail Indusry ussell Lundholm Sarah cvay aylor andall Why forecas financial saemens? Seems obvious, bu wo common criicisms: Who cares, can we can look
More informationMaking Use of Gate Charge Information in MOSFET and IGBT Data Sheets
Making Use of ae Charge Informaion in MOSFET and IBT Daa Shees Ralph McArhur Senior Applicaions Engineer Advanced Power Technology 405 S.W. Columbia Sree Bend, Oregon 97702 Power MOSFETs and IBTs have
More information1. y 5y + 6y = 2e t Solution: Characteristic equation is r 2 5r +6 = 0, therefore r 1 = 2, r 2 = 3, and y 1 (t) = e 2t,
Homework6 Soluions.7 In Problem hrough 4 use he mehod of variaion of parameers o find a paricular soluion of he given differenial equaion. Then check your answer by using he mehod of undeermined coeffiens..
More informationSecuritization of Senior Life Settlements: Managing Interest Rate Risk with a Planned Duration Class
1 Securiizaion of Senior Life Selemens: Managing Ineres Rae Risk wih a Planned Duraion Class Carlos E. Oriz Arcadia Universiy Deparmen of Mahemaics and Compuer Science oriz@arcadia.edu Charles A. Sone
More informationINVESTMENT GUARANTEES IN UNITLINKED LIFE INSURANCE PRODUCTS: COMPARING COST AND PERFORMANCE
INVESMEN UARANEES IN UNILINKED LIFE INSURANCE PRODUCS: COMPARIN COS AND PERFORMANCE NADINE AZER HAO SCHMEISER WORKIN PAPERS ON RISK MANAEMEN AND INSURANCE NO. 4 EDIED BY HAO SCHMEISER CHAIR FOR RISK MANAEMEN
More informationIssues Using OLS with Time Series Data. Time series data NOT randomly sampled in same way as cross sectional each obs not i.i.d
These noes largely concern auocorrelaion Issues Using OLS wih Time Series Daa Recall main poins from Chaper 10: Time series daa NOT randomly sampled in same way as cross secional each obs no i.i.d Why?
More informationMarket Liquidity and the Impacts of the Computerized Trading System: Evidence from the Stock Exchange of Thailand
36 Invesmen Managemen and Financial Innovaions, 4/4 Marke Liquidiy and he Impacs of he Compuerized Trading Sysem: Evidence from he Sock Exchange of Thailand Sorasar Sukcharoensin 1, Pariyada Srisopisawa,
More informationIndexing Executive Stock Options Relatively
Indexing Execuive Sock Opions Relaively JinChuan Duan and Jason Wei Joseph L. Roman School of Managemen Universiy of Torono 105 S. George Sree Torono, Onario Canada, M5S 3E6 jcduan@roman.uorono.ca wei@roman.uorono.ca
More informationAnswer, Key Homework 2 David McIntyre 45123 Mar 25, 2004 1
Answer, Key Homework 2 Daid McInyre 4123 Mar 2, 2004 1 This prinou should hae 1 quesions. Muliplechoice quesions may coninue on he ne column or page find all choices before making your selecion. The
More information