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This paper performs the empirical analysis on the factors affection the hedge effectiveness of Korea Treasury Bond (KTB) Futures by different hedge models. Before analyzing the factors, firstly, we compare the hedge effectiveness for benchmark bond portfolio among different hedge models. We find that KTB Futures' hedge effectiveness do not produce significant difference depending on the different models.

Secondly, we test hedge effectiveness for the corporate bond. The results vary depending on the credit ranks. Below BBB rating, hedge effectiveness deteriorated significantly. This seems to be caused by the fact that BBB rated bond is more prone to be affected by credit risk rather than interest rate risk.

Thirdly, hedge effectiveness analysis for the maturity term mismatch, KTB Futures has performed poorly as underlying bond maturity mismatching with Futures. Finally, different yield curve shape, Futures price undervaluation or time to maturity of Futures do not produce significant effect for the hedge effectiveness.

In summary hedge effectiveness of KTB Futures (3 Year, 10 Year) seems to be dominantly affected by the 1) underlying hedging bond credit rating and 2) hedge term mismatch. Other factors such as yield curve shape, undervaluation of Futures and time to maturity of Futures has limited contribution under our research.

The purpose of this paper is to measure the effectiveness of the hedging with futures currency contracts. Measuring the effectiveness of hedging has become mandatory for Indian companies as the new Indian accounting standards, Ind-AS, specify that the effectiveness of hedges taken by the companies should be evaluated using quantitative methods but leaves it to the company to choose a method of evaluation.

The paper compares three models for evaluating the effectiveness of hedge – ordinary least square (OLS), vector error correction model (VECM) and dynamic conditional correlation multivariate GARCH (DCC-MGARCH) model. The OLS and VECM are the static models, whereas DCC-MGARCH is a dynamic model.

The overall results of the study show that dynamic model (DCC-MGARCH) is a better model for calculating the hedge effectiveness as it outperforms OLS and VECM models.

The new Indian accounting standards (Ind-AS) mandates the calculation of hedge effectiveness. The results of this study are useful for the treasurers in identifying appropriate method for evaluation of hedge effectiveness. Similarly, policymakers and auditors are benefitted as the study provides clarity on different methods of evaluation of hedging effectiveness.

Many previous studies have evaluated the efficiency of the Indian currency futures market, but with rising importance of hedging in the Indian companies, Reserve Bank of India’s initiatives and encouragement for the use of futures for hedging the currency risk and now the mandatory accounting requirement for measuring hedging effectiveness, it has become more relevant to evaluate the effectiveness of hedge. To the authors’ best knowledge, this is one of the first few papers which evaluate the effectiveness of the currency future hedging.

The hedging effectiveness of real estate investment trust (REIT) futures as a critical issue in response to the global REIT market has been extremely volatile in recent years, however few studies have been placed on this area. This study aims to fill in this gap and examine the hedging effectiveness of Australian and Japanese REIT futures over 2002‐2010.

The analysis of this study involves two stages. The first stage is to estimate optimal hedge ratios. A variety of hedging methods is employed, including a traditional hedge, an ordinary least squares (OLS) model and a bivariate GARCH model. Thereafter, the hedging effectiveness of these strategies is assessed individually.

The empirical results show REIT futures are effective hedging instruments in which a risk reduction of 37 per cent‐78 per cent (34 per cent‐52 per cent) for Australian (Japanese) REITs is evident. Importantly, the results also reveal that REIT futures outperform other hedging instruments in which a weaker risk reduction is found by stock, interest rate and foreign currency futures contracts. Moreover, the hedging effectiveness of REIT futures is dynamic and varies over time.

The findings enable more informed and practical investment decision‐making regarding the role of REIT futures in risk management.

This paper, as far as the authors are aware, is the first study to offer empirical evidence of the risk‐reduction effectiveness of REIT futures. The hedging effectiveness of REIT futures is also compared to other hedging instruments for the first time.

Corporate treasurers manage the currency risk of their organization by hedging through futures contracts. The purpose of this paper is to evaluate the effectiveness of hedging by US currency futures contracts by taking into account the efficiency of the currency market.

The static models for calculating hedge ratio are as popular as dynamic models. But the main disadvantage with the static models is that they do not consider important properties of time series like autocorrelation and heteroskedasticity of the residuals and also ignore the cointegration of the market variables which indicate short-run market disequilibrium. The present study, therefore, measures the hedging effectiveness in the US currency futures market using two dynamic models – constant conditional correlation multivariate generalized ARCH (CCC-MGARCH) and dynamic conditional correlation multivariate GARCH (DCC-MGARCH).

The study finds that both the dynamic models used in the study provide similar results. The relative comparison of CCC-MGARCH and DCC-MGARCH models shows that CCC-MGARCH provides better hedging effectiveness result, and thus, should be preferred over the other model.

The findings of the study are important for the company treasurers since the new updated Indian accounting standards (Ind-AS), applicable from the financial year 2016–2017, make it mandatory for the companies to evaluate the effectiveness of hedges. These standards do not specify a quantitative method of evaluation but provide the flexibility to the companies in choosing an appropriate method which justifies their risk management objective. These results are also useful for the policy makers as they can specify and list the appropriate methods for evaluating the hedge effectiveness in the currency market.

Majorly, the studies on Indian financial market limit themselves to either examining the efficiency of that market or to evaluate the effectiveness of the hedges undertaken. Moreover, most of such works focus on the stock market or the commodity market in India. This is one of the first studies which bring together the concepts of efficiency of the market and effectiveness of the hedges in the Indian currency futures market.

Exposure risk managers can hedge exchange rate risk with either currency futures or currency options. It is generally suggested that hedgers should choose a hedge instrument that matches the risk profile of the underlying currency position as closely as possible. This advice, however, ignores the possibility that the hedging effectiveness may differ for the alternate risk management tools. This study compares the effectiveness of currency futures and currency options as hedging instruments for covered and uncovered currency positions. Based on Ederington's portfolio theory of hedging, the results show that currency futures provide the more effective covered hedge, while currency options (used to construct a synthetic futures contract) are more effective for an uncovered hedge. Hence, exposure risk managers do not have to sacrifice hedging effectiveness to obtain the desired risk profile. Corporations engaged in international business transactions are commonly exposed to exchange rate risk. Since management is concerned with currency exposure, it can hedge the anticipated exchange rate risk either with futures or options. The choice of the appropriate hedging tool is generally influenced by the type of currency exposure (transaction, translation, or economic risk), the size of the firm, the industry effect, the risk preference of the manager or the firm and his/her familiarity with the available financial instruments and techniques. It is also suggested that a hedger should choose a hedge instrument that matches the risk profile of the underlying currency position as closely as possible. Hence, futures contracts are more suitable for covered hedges, while option contracts are best used for uncovered hedges. Hedging effectiveness of these two hedge instruments must be considered as well in order to evaluate the cost of obtaining the desired risk profile. Some empirical research has shown that the futures contract provides both an appropriate risk profile and a more effective hedge than an options contract for covered positions. If these findings also hold for uncovered currency positions, then the hedging decision involves a trade‐off between the desired risk profile and hedging effectiveness. That is, a hedger would have to decide whether the extra risk protection afforded by the attractive risk profile of options is worth the loss in hedging performance. This study compares the hedging effectiveness of currency futures and currency options for both covered and uncovered positions. Ederington's risk‐minimizing approach is applied to estimate the hedging effectiveness and the least risk hedge ratios which, in turn, are used to assess the trade‐off between risk profile and hedging performance.

The paper aims to conduct an empirical study of three models of property derivatives: index-based derivatives, factor hedges, and combinative hedges based on index and factors. The objective is to test whether the latter two models introduced by Lecomte dominate the index-based model used for existing property derivatives such as EUREX futures contracts.

Based on investment property database (IPD) historical database covering 224 individual office properties from 1981 to 2007, the study assesses ex ante hedging effectiveness of the three models. Nine simulations are run under different hypotheses involving individual buildings and portfolios. The 17 factors included in the study cover both macro-factors (e.g. macroeconomic indicators) and micro-factors linked to the properties (e.g. age).

Atomization and periodic rebalancing of property derivatives' underlying make it possible to substantially increase hedging effectiveness for a large majority of buildings in the sample. However, combinative hedges are overall superior to factor hedges owing to the overriding role played by IPD indices in capturing risk.

Due to confidentiality requirements inherent to the use of property level data, the study downplays the role of micro-factors on real estate risk at the property level.

The paper introduces a typology of optimal hedges aimed at individual property owners and portfolio holders in the City office property market.

This is the first time a comprehensive analysis of different models of property derivatives is conducted. The value of the paper stems from the use of property level data.

We examine whether the hedging effectiveness of crude oil futures is affected by asymmetry in the return distribution by applying tail-specific metrics to compare the hedging effectiveness of both short and long hedgers. The hedging effectiveness metrics we use are based on lower partial moments (LPM), value at risk (VaR) and conditional value at risk (CVaR). Comparisons are applied to a number of hedging strategies including ordinary least square (OLS), and both symmetric and asymmetric GARCH models. We find that OLS provides consistently better performance across different measures of hedging effectiveness as compared with GARCH models, irrespective of the characteristics of the underlying distribution.

This present work aims at looking into whether or not introducing commodities in international equity portfolios helps reduce the market risk and if hedging is carried out with the same effectiveness across different regional stock markets.

The authors determine the optimal hedge ratios and hedging effectiveness of a number of commodity-hedged emerging and developed equity markets, using three versions of MGARCH model: DCC, ADCC and GO-GARCH. The authors also use a rolling window estimation procedure for the purpose of constructing out-of-sample one-step-ahead forecasts of dynamic conditional correlations and optimal hedge ratios.

Empirical results evince that commodities significantly display effective risk-reducing hedge instruments in short and long runs. The main finding is that commodities do not seem to hedge regional stock markets in the same way. They tend to provide evidence of a rather effective hedging regarding mainly the East European and Latin American stock markets.

The authors study whether commodities can hedge stock markets at regional context and if hedging effectiveness differ from one region to another.

This study aims to investigate the spillover between the Middle East and North Africa (MENA) stock index and several security indices, including Sukuk and conventional bond, and ultimately compare the hedge effectiveness of Sukuk and conventional bond.

The study uses VAR (1)-asymmetric Baba, Engle, Kraft and Kroner-multivariate generalized autoregressive conditional heteroskedasticity (1,1) model to analyze the volatility and shock and asymmetric shock spillover between Sukuk index and several bond indices in the MENA region including, Bond, All Bond, High Yield Bond and Bond and Sukuk and MENA stock market index and ultimately compare the hedging capabilities of Sukuk and conventional bonds by calculating the optimal portfolio weights for securities indices and stock portfolios and hedge effectiveness of security indices.

Results indicate that there is no shock, volatility and asymmetric shock spillover between the Sukuk index and MENA stock index, implying that Sukuk indices behave independently from MENA stock indices; however, there is shock and asymmetric shock spillover between MENA stock indices and security indices that include conventional bonds. The result of optimal portfolio weights and corresponding hedge effectiveness indicate that Sukuk is the most significant asset among other security indices in diversifying and hedging stock MENA portfolios. Moreover, the hedge effectiveness of Sukuk shows persistent trends during both the normal and crisis periods.

The study suggests that MENA stock market investors and investment managers should add Sukuk instead of the conventional bond to their portfolio to hedge their portfolio against investment risks during both normal and crisis periods.

Although many studies compare many aspects of Sukuk and conventional bonds, this is the first study that compares the hedge effectiveness of Sukuk and conventional bond based on the time-varying optimal portfolio weights strategy.

A futures contract may rely upon physical delivery or cash settlement to liquidate open positions at the maturity date. Contract settlement specification has direct impacts on the behavior of the futures price, leading to different effects of liquidity risk on futures hedging. This chapter compares such effects under alternative settlement specifications with a simple analytical model of daily price change. Numerical simulation results demonstrate that capital constraint reduces hedging effectiveness and tends to produce a lower optimal hedge ratio. As the futures contract proceeds toward the maturity date, hedgers will take larger hedge position in order to achieve better hedging effectiveness. Finally, optimal hedge ratios are higher (resp. lower) under cash settlement for the bivariate normal (resp. lognormal) assumptions, whereas hedging effectiveness is almost always greater under cash settlement.