Spot Asset Carry Cost Rates and Futures Hedge Ratios

45 Pages Posted: 28 Nov 2020

See all articles by Dean Leistikow

Dean Leistikow

Fordham University - Finance Area

Ren-Raw Chen

affiliation not provided to SSRN

Yuewu Xu

Fordham University - Gabelli School of Business

Date Written: September 20, 2020

Abstract

Since the 1970s, futures hedge ratios have traditionally been calculated ex-post via economically structure-less statistical analyses. This paper proposes an ex-ante, more efficient, computationally simpler, general “carry cost rate” based hedge ratio. Though the proposed hedge ratio is biased, its bias is stationary and mitigable via a one-time calculation. Thus, unlike the traditional hedge ratio, the proposed unadjusted and bias-adjusted “carry cost rate” hedge ratios are trivial to update. Finally, the paper shows that the hedge ratio’s biasadjusted version has hedge-effectiveness higher than that for either the “traditional” or “naïve” futures benchmark hedge ratios in diverse real and simulated markets.

Keywords: carry cost rate, ex-ante futures hedge ratio, ex-post hedge ratio

JEL Classification: G32

Suggested Citation

Leistikow, Dean and Chen, Ren-Raw and Xu, Yuewu, Spot Asset Carry Cost Rates and Futures Hedge Ratios (September 20, 2020). Available at SSRN: https://ssrn.com/abstract=3710893 or http://dx.doi.org/10.2139/ssrn.3710893

Dean Leistikow (Contact Author)

Fordham University - Finance Area ( email )

33 West 60th Street
New York, NY 10023
United States

Ren-Raw Chen

affiliation not provided to SSRN

Yuewu Xu

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
New York, NY 10458
United States

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