According to the risk minimization model, the optimal hedging ratio in stock index futures hedging is equal to the ratio of covariance of spot price return to futures price return and variance of futures price return, which is very close to the calculation method of β value. If the hedging of stock index futures is regarded as a combination of spot and futures, then under certain conditions, the β value is equal to the optimal hedging ratio, which means that the β value can replace the optimal hedging ratio to hedge stock index futures.
There are many models to calculate the optimal hedging ratio, but their calculation models are very complicated. In contrast, the β value can be expressed as the slope in the least square regression model, which is much easier to calculate. Although the least square regression model has great defects, many research articles have found that the calculation results of several models are not much different. In this way, the β value can better replace the optimal hedging ratio.
Because the hedging effect of stock index futures depends on whether stock index futures positions can effectively hedge the risk of spot positions, the optimal hedging ratio is used to calculate the hedging quantity of futures contracts. It is to divide the total spot value by the value of a stock index futures contract and then multiply it by the optimal hedging ratio. Because β value can replace the optimal hedging ratio, the total spot value can be divided by the value of a stock index futures contract and multiplied by β value to get the number of stock index futures contracts.
If we want to change the risk-return characteristics of the portfolio, we only need to slightly evolve the calculation formula of the number of stock index futures contracts and calculate the number of stock index futures contracts. If the new value is greater than the original β value, you need to buy a futures contract; If the value is less than the beta value, the stock index futures contract is sold.
However, in reality, changing the risk-return characteristics of the portfolio may exceed the risk tolerance of investors, especially for funds with smaller risk-return characteristics. In this regard, foreign investment experts adopt transferable alpha strategy to maximize the investment income on the basis of effectively controlling the overall risk of the portfolio. The principle of transferable alpha strategy is to use financial derivatives (index futures) representing the market benchmark to offset the market risk (β value), and then obtain excess alpha returns. Datong Securities Co. Ltd.