TO FIND THE OPTIMAL HEDGE RATIO OF NIFTY 50 AND BANK NIFTY FUTURES USING OLS METHOD

Abstract

The report titled “To find the optimal hedge ratio of NIFTY 50 and BANK NIFTY futures using OLS method” is a report based on the study carried out by me of the futures market in India with respect to index futures traded in NSE. It is a part of the course work of 4th semester, to be submitted as a requirement of the MBA program of Delhi School of Management, Delhi Technological University. The objectives of the report are to find the optimal hedge ratio of index futures and their hedging effectiveness using the OLS method. It is the study of index futures of NIFTY and BANK NIFTY indices, traded at NSE. This Report is divided into six chapters. The first chapter of this study deals with introduction that presents the financial markets in general and Indian stock futures market in particular. It talks about the various derivative products that are traded in NSE. Futures are discussed in detail with emphasis on its functions and importance. The second chapter of the report presents the literature review. This talks about the various studies that have been conducted in the past with respect to hedging and calculation of hedge ratios. Few papers are based on the Indian scenario and helps in understanding how emerging market like India are doing with respect to futures trading. Literature also tells us about the various econometrics techniques to be followed in order to test the objectives of the study. The third chapter is about the research methodology. The fourth chapter gives the test results and their analysis. Daily spot and futures returns are calculated in lognormal form and regression line is fitted on them. The slope of the regression line gives the hedge ratio. The hedge effectiveness is calculated using the value of R2. The fifth chapter summarizes the findings and concludes the discussion. The results show that index futures can provide an effective hedge against market movements and a simple OLS technique can be used to calculate the optimal hedge ratio. The report is winded up with the sixth chapter on bibliography.