Optimization of Composite Hedging Structure

Abstract

The problem of efficiency increasing when using future contracts portfolio as a tool of hedging is discussed. For the case of two future contracts, the formula which allows defining shares of each contract, providing the maximal efficiency, was obtained. The example of composite hedging on the basis of a real situation at the currency market of Russia is considered. For the case when results of hedging depend on more than one factor of efficiency, the approach to composite structure optimization based on the hedger’s individual utility function is proposed.

Keywords:

composite hedging, future, exchange, hedge ratio, optimization