A Comparative Analysis of Hedging Effectiveness of Won/Dollar Futures and NDF Contracts

Won Cheol Yun (Hanyang University)
Hyun Jin An (Hanyang University)

Journal of Derivatives and Quantitative Studies: 선물연구

ISSN: 1229-988X

Article publication date: 30 November 2004

Abstract

This study compares the hedging effectiveness of domestic won/dollar futures and foreign non-deferable forward (NDF) contracts. We use an ex ante analysis based on out-of-sample data. In addition, the analysis is based on the inventory hedging scenario, adopted in most of previous studies. We estimated hedge ratios by using the various method of 1 : 1 hedging, ordinary least squares (OLS), and error correction model (ECM). The hedging period is expanded to include one to twelve months‘ In every aspect, the hedging effectiveness of won/dollar futures contract turns out to be better than that of NDF contract. However, the differences are not statistically significant at 10% level. This res비t stems from the fact that there exists a high correlation between spot exchange rate and futures or forward exchange rates, implying an evidence of co-movement between them.

Keywords

Citation

Yun, W.C. and An, H.J. (2004), "A Comparative Analysis of Hedging Effectiveness of Won/Dollar Futures and NDF Contracts", Journal of Derivatives and Quantitative Studies: 선물연구, Vol. 12 No. 2, pp. 73-99. https://doi.org/10.1108/JDQS-02-2004-B0004

Publisher

:

Emerald Publishing Limited

Copyright © 2004 Emerald Publishing Limited

License

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