An Empirical Analysis of the Hedging Effectiveness of Currency Futures

Posted: 13 Jul 1998

See all articles by Frans de Roon

Frans de Roon

Tilburg University - Department of Finance

Abe de Jong

Rotterdam School of Management, Erasmus University

Chris Veld

Monash University

Date Written: December 1995

Abstract

Existing research on the hedging effectiveness of currency futures assumes that futures positions are continuously adjusted. This is an unrealistic assumption in practice. In this paper we study the hedging effectiveness for futures positions which are not adjusted during the hedge period. For this purpose an out-of-sample approach is used. Three models are used to determine hedge ratios and hedging effectiveness. These are the minimum-variance model of Ederington (1979), the target return model of Fishburn (1977), which is a model in which the disutility of a loss is minimized, and the Sharpe-ratio model of Howard and D'Antonio (1984, 1987). For the minimum-variance model and the target return model it is found that the naively hedged positions yield a higher effectiveness than the unadjusted model-based hedged positions. For the Sharpe-ratio model it is found that both naively and model-based hedged positions lead to a lower hedging effectiveness than unhedged positions.

JEL Classification: G13

Suggested Citation

de Roon, Frans A. and de Jong, Abe and Veld, Chris, An Empirical Analysis of the Hedging Effectiveness of Currency Futures (December 1995 ). Available at SSRN: https://ssrn.com/abstract=7027

Frans A. De Roon

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 1 3466 8361/3025 (Phone)
+31 1 3466 2875 (Fax)

Abe De Jong (Contact Author)

Rotterdam School of Management, Erasmus University ( email )

P.O. Box 1738
Room T08-25
Rotterdam, 3000 DR
Netherlands
+31 10 408 1022 (Phone)

HOME PAGE: http://https://www.rsm.nl/people/abe-de-jong/

Chris Veld

Monash University ( email )

Building 11E
Clayton, Victoria 3800
Australia

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