Hedging Effectiveness of KOSPI200 Index Futures and Options

Abstract

The purpose of this study is to investigate hedging effectiveness of KOSPI200 index futures and options using three measures proposed by Fishburn (1977), Ederington (1979), and Howard and D’Antonio (1987). The comparison of hedging effectiveness is conducted based on the market prices of KOSPI200 index futures and options traded in Korea Exchange (KRX) between January of 2001 and January of 2011, during which bootstrapping method is utilized to make a dataset of 100,000 random samples with holding period of 1, 3, 6, and 12 months, respectively. We examine the hedging performance of hedge portfolios made of short futures, protective puts and covered calls respectively based on three hedging effectiveness measures.

One of our finding is that short futures hedging is better than options in minimizing total volatility risk as well as down-side risk, which is consistent to the previous researches. Also futures hedging is more effective in reducing the VaR than the others. Secondly, the optimal hedge ratios of futures in minimizing total risk and down-side risk are turned out to be 0.97~0.98 and 0.94~0.95 respectively. Third, OTM short call hedge is the best hedging instrument when hedgers would like to maximize the Sharpe ratio. Finally, protective put hedging strategy is in general inferior to the short futures and covered call hedge based on three hedging effectiveness measures.

Citation

Choi, B. (2013), "Hedging Effectiveness of KOSPI200 Index Futures and Options", Journal of Derivatives and Quantitative Studies: 선물연구, Vol. 21 No. 3, pp. 275-305. https://doi.org/10.1108/JDQS-03-2013-B0002