Alchemy in the 21st Century: Hedging with Gold Futures

48 Pages Posted: 6 Aug 2010 Last revised: 17 Aug 2010

See all articles by Caihong Xu

Caihong Xu

Stockholm University - Stockholm Business School

Lars L. Norden

Stockholm University - Stockholm Business School

Björn Hagströmer

Stockholm University - Stockholm Business School

Date Written: August 4, 2010

Abstract

Recently, the Shanghai Futures Exchange (SHFE) introduced gold futures trading in China. This paper is the first to study the SHFE gold futures, and to evaluate the futures hedging effectiveness since the introduction. The results show that hedging with gold futures reduces the variance of a hedged gold spot position by about 88% in its first two years of existence. During the second half of 2008, however, when the global financial crisis escalated, the variance reduction dropped to about 70%. Overall, the new Chinese gold futures prove to be attractive and well-needed hedging vehicles for domestic Chinese gold producers, refiners, consumers and investors.

Keywords: Gold futures, China’s gold market, Hedging effectiveness

JEL Classification: G13

Suggested Citation

Xu, Caihong and Nordén, Lars L. and Hagströmer, Björn, Alchemy in the 21st Century: Hedging with Gold Futures (August 4, 2010). Available at SSRN: https://ssrn.com/abstract=1653297 or http://dx.doi.org/10.2139/ssrn.1653297

Caihong Xu

Stockholm University - Stockholm Business School ( email )

Roslagsvägen 1010
Stockholm, SE-106 91
Sweden

Lars L. Nordén (Contact Author)

Stockholm University - Stockholm Business School ( email )

Sweden

Björn Hagströmer

Stockholm University - Stockholm Business School ( email )

Stockholm
Sweden

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