Therefore, a properly
hedged portfolio should have a good combination of both asset classes.
With the consideration of the information set at the time t - [tau], we can obtain the following optimal dynamic hedge ratio by minimizing risk of the
hedged portfolio [pi] = [S.sub.t] - [h.sub.t-[tau]][F.sub.t], or d[pi] = d[S.sub.t] - [h.sub.t-[tau]]d[F.sub.t]:
However, during such times of stable markets, the hedging benefits are not of great value to investors, as the offsetting effects are likely to decrease the returns of the
hedged portfolio. Instead, investors can expect higher benefits of holding a long position in gold assets during periods of abnormal market volatility.
Compared with the minimum variance of unhedged portfolio returns, Ederington [19] asserted that percentage reduction in the variance of
hedged portfolio returns estimate hedging effectiveness (HE).
Given this hedging strategy, domestic currency return of an investment in foreign
hedged portfolio will be:
Weise, 1994, "Competing Derivative Equity Instruments--Empirical-Evidence on
Hedged Portfolio Performance", Journal of Futures Markets, 14:421-436
(15) To determine the
hedged portfolio return that would be realized by optimally weighting the portfolio based on the fundamental signals, we estimate the following equation:
A perfectly
hedged portfolio - that is, one in which all financial risk is neutralized - would naturally have no uncertainty and translate to the VAR being a single value without any range in value (i.e., no uncertainty equals no risk).
Indeed, the
hedged portfolio value turns negative where the options value and the hedge value intersect.
the
hedged portfolio return.(2) The impact on hedged
One of the most thought-provoking items a board member might hear is, "We made $10 million on our
hedged portfolio last year." The inquisitive board member responds: "Are we hedging or are we speculating?"