Futures contracts as hedges on equity investments

Abstract

In this work we try to identify, assess and evaluate the hedging performance of derivative contracts on equity portfolios that are available in the financial markets. We specifically focus on the use of future contracts, such as gold and oil futures, as hedgers on equity indices. We first present in brief theory and basics of equity investments and financial derivatives. We further focus on the concept of hedging and the uses and characteristics of future contracts. The thesis continues with a literature review on how the optimal hedge ratio is defined and how it can be estimated with the implementation of econometric models. We then employ multivariate GARCH BEKK models in order to estimate the dynamic conditional variance of the assets returns and evaluate the performance of their hedge ratios. Finally, we discuss the results and conclude with investment proposals.