Hedging Effectiveness

The extent to which hedging an investment actually reduces risk. There are a large number of hedging strategies one can use. For example, one may take a long position on a security and then sell short the same security. However, some strategies may be forms of naive diversification, which reduce hedging effectiveness. In an extreme example, if one buys a stock and then short sells a bond in a completely different industry, one is more likely to increase risk rather than decrease it.

References in periodicals archive ?

The hedging effectiveness of the SDE-MV model outperforms the MV model and the FSDE model; thus the SDE-MV model performs better both in sample and out of sample when the Hurst parameter of the spot is larger than the futures.

Dynamic Hedging Based on Fractional Order Stochastic Model with Memory Effect

Our results show that purchasing gap insurance can generally increase the hedging effectiveness in multiple ways by reducing basis risk, thus increasing shareholder value and, at the same time, lowering shortfall risk.

The effectiveness of gap insurance with respect to basis risk in a shareholder value maximization setting

For explanation of hedging effectiveness, basis risk and derivation of hedge ratio, see, among others, Hull (2012).

Mitigating vulnerability to oil price risk--applicability of risk models to Pakistan's energy problem

Overall, the results are comparable to the baseline results, suggesting that the conclusion made earlier with respect to the larger estimation period still hold in general and in particular the institutional involvement is related to the hedging effectiveness of real estate stocks.

Do European real estate stocks hedge inflation? Evidence from developed and emerging markets

Based on the out of sample hedging effectiveness given by the variance reduction, the methods are compared.

Price uncertainty and optimal hedging in the agricultural market

In addition, for any given model the more "exotic" the option, the poorer the hedging effectiveness.

An empirical comparison of option-pricing models in hedging exotic options

The underlying index, which is derived from the price of a basket of routes, could not hedge well for individual route because hedging effectiveness is directly related to the underlying risk.

Freight transportation derivatives contracts: state of the art and future developments

There are three primary methods of testing the hedging effectiveness of forwards, futures, and swaps when the critical terms of the hedging derivative and the hedged item are not identical: the dollar-offset method, the variability-reduction method, and the regression method.

Testing hedge effectiveness under SFAS 133. (Putting the Numbers in Focus)

TABLE 1 Measuring the Hedging Effectiveness of an Aluminum Forward Hedge Using the Dollar-Offset Method, 1998-2000 (a) 1998 1998 1998 1998 1999 1999 1999 Quarter 1 2 3 4 1 2 3 Current Quarter's Data Including forward premium 0.

Alternative approaches to testing hedge effectiveness under SFAS No. 133

Yau, Hill and Schneeweis (1990) studied the hedging effectiveness of the Nikkei 225 contract under three hedging analytical frameworks.

Hedging with the Nikkei Index Futures: the conventional model versus the error correction model

Sensitivity analysis concludes the research by exploring the impact of basis risk, variable hedging cost, jump volatility, and jump intensity on hedging effectiveness.

Optimum hurricane futures hedge in a warming environment: a risk-return jump-diffusion approach

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