Spot Asset Carry Cost Rates and Futures Hedge Ratios
45 Pages Posted: 28 Nov 2020
Date Written: September 20, 2020
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: Suggested Citation