STUDY ON THE CONCEPT OF OPTIMAL HEDGE RATIO AND HEDGING EFFECTIVENESS: AN EXAMPLE FROM ICICI BANK FUTURES

Hedging is transferring of risk from those who want to reduce risk to those who are willing to take the risk. Hedgers are traders who want to reduce risk and speculators are those willing to take the risk. The hedge ratio is defined as the ratio of the size of the position taken in the futures market to the size of the position in the spot market. If such a ratio minimizes the total risk (variance) of the portfolio, then it is said to be optimal. Hedging effectiveness is defined as the ratio of the variance of the unhedged position minus variance of the hedged position over the variance of unhedged position. The study explain this concept by selecting ICICI bank futures. VECM and CCC-MGARCH model is used to analyse time series data.