Alchemy in the 21st Century: Hedging with Gold Futures
48 Pages Posted: 6 Aug 2010 Last revised: 17 Aug 2010
Date Written: August 4, 2010
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: Suggested Citation