Basis risk and liquidity risk are the main risks in the hedging process. These risks cannot be avoided by the accurate matching model of current positions, and can only be solved by some futures trading strategies.
Extension is to flatten the old and update the new. Whether leveling the old contract or renewing the new contract, you will face the basis difference. From the perspective of hedging, the price difference between the old and new contracts is the main risk that investors face when they extend their contracts. If investors choose the final extension, this risk is completely exposed, and if they choose the dynamic extension of the term, this risk may be avoided.
In addition, liquidity is one of the important risks that must be considered in hedging. In China's stock index futures market, only the recent month contracts, especially the current month contracts, are liquid and suitable for hedging. Therefore, when hedging, the liquidity of the corresponding contract must be considered. It is a good time to renew the contract only if the transaction volume of the contract increases and the liquidity becomes greater next month; Otherwise, when the contract liquidity is insufficient next month, it will be blindly extended, which will easily fall into the liquidity trap and expose risks.
This paper provides two extension schemes to solve the main risks in the extension & liquidity risk and basis risk.
1. Rolling extension in time domain according to volume.
Time-domain rolling extension by volume means that with the approach of the expiration date of the current month's contract, the trading volume of the current month's contract gradually decreases and the trading volume of the next month's contract gradually increases during the month-changing period of the futures contract (about one week), and investors gradually transfer the positions on the current month's contract to the next month.
For example, on June 1 day, 2065438, investor A holds a portfolio of 7 stocks and is bearish on the market outlook, preparing to hedge between June 1 day and August 1 day, 2065438.
The expiration date of the July contract is July 16, and investor A needs to hedge it until August 1, so investor A needs to extend it.
According to the operation of stock index futures in China, generally speaking, the contract expiration week is a typical month-changing week. So we choose the week from July 12 to July 16, and carry out the extension operation according to the transaction volume.
According to the least square method, calculate the number of contracts to be hedged.
(1) All are hedged with the current month's contract.
The best number of contracts that should be sold short when hedging is: ■
Where s is the value of the portfolio and f is the price of the underlying assets of the futures contract (equal to the futures price multiplied by the contract size).
(2) The contract of the current month is postponed to next month or so.
When specifying contracts for next month, the best number of contracts that should be sold short in that month is: ■
Where N 1 is the number of contracts in the current month, N2 is the number of contracts in the next month, F 1 is the asset price of the underlying futures contract in the current month, and F2 is the asset price of the underlying futures contract in the next month.
In a word, the results are shown in table 1.
Table 1: rolling expansion of time domain by volume
■
2. Hedging plus arbitrage expansion
Hedging plus arbitrage extension refers to using the average recovery characteristics of the price difference between the current month's contract and the next month's contract, which is similar to selling the price difference high and selling it low, and earning the price difference while hedging.
We analyze the 60-minute price difference between IF 1008 and IF 1007 contracts. From June 22 to July 8, 20 10, 55 60-minute transmissions were statistically analyzed, and it was found that this transmission was a stationary white noise sequence. As shown in figure 1.
The average value is 16.67 points, and the standard deviation is 1 1.60 points. According to the principle of statistical arbitrage, the optimal trading range is 7.97 and 25.37, that is, when the spread is less than or equal to 7.97, the current month's contract is used for hedging, and when the spread is greater than or equal to 25.37, the next month's contract is used for hedging.
Extension refers to a long-term asset hedging scheme in which the near-month futures contract with high liquidity is continuously used instead of the far-month futures contract with poor liquidity, that is, when hedging an asset, if there is no corresponding far-month futures contract within the expiration time, there is only the near-month futures contract; Or the liquidity of the far-month futures contract is too low to meet the requirements of hedging, so it is necessary to adopt the method of delaying hedging.
Basis risk and liquidity risk are the main risks in the hedging process. These risks cannot be avoided by the accurate matching model of current positions, and can only be solved by some futures trading strategies.
Extension is to flatten the old and update the new. Whether leveling the old contract or renewing the new contract, you will face the basis difference. From the perspective of hedging, the price difference between the old and new contracts is the main risk that investors face when they extend their contracts. If investors choose the final extension, this risk is completely exposed, and if they choose the dynamic extension of the term, this risk may be avoided.
In addition, liquidity is one of the important risks that must be considered in hedging. In China's stock index futures market, only the recent month contracts, especially the current month contracts, are liquid and suitable for hedging. Therefore, when hedging, the liquidity of the corresponding contract must be considered. It is a good time to renew the contract only if the transaction volume of the contract increases and the liquidity becomes greater next month; Otherwise, when the contract liquidity is insufficient next month, it will be blindly extended, which will easily fall into the liquidity trap and expose risks.
This paper provides two extension schemes to solve the main risks in the extension & liquidity risk and basis risk.
1. Rolling extension in time domain according to volume.
Time-domain rolling extension by volume means that with the approach of the expiration date of the current month's contract, the trading volume of the current month's contract gradually decreases and the trading volume of the next month's contract gradually increases during the month-changing period of the futures contract (about one week), and investors gradually transfer the positions on the current month's contract to the next month.
For example, on June 1 day, 2065438, investor A holds a portfolio of 7 stocks and is bearish on the market outlook, preparing to hedge between June 1 day and August 1 day, 2065438.
The expiration date of the July contract is July 16, and investor A needs to hedge it until August 1, so investor A needs to extend it.
According to the operation of stock index futures in China, generally speaking, the contract expiration week is a typical month-changing week. So we choose the week from July 12 to July 16, and carry out the extension operation according to the transaction volume.
According to the least square method, calculate the number of contracts to be hedged.
(1) All are hedged with the current month's contract.
The best number of contracts that should be sold short when hedging is: ■
Where s is the value of the portfolio and f is the price of the underlying assets of the futures contract (equal to the futures price multiplied by the contract size).
(2) The contract of the current month is postponed to next month or so.
When specifying contracts for next month, the best number of contracts that should be sold short in that month is: ■
Where N 1 is the number of contracts in the current month, N2 is the number of contracts in the next month, F 1 is the asset price of the underlying futures contract in the current month, and F2 is the asset price of the underlying futures contract in the next month.
In a word, the results are shown in table 1.
Table 1: rolling expansion of time domain by volume
■
2. Hedging plus arbitrage expansion
Hedging plus arbitrage extension refers to using the average recovery characteristics of the price difference between the current month's contract and the next month's contract, which is similar to selling the price difference high and selling it low, and earning the price difference while hedging.
We analyze the 60-minute price difference between IF 1008 and IF 1007 contracts. From June 22 to July 8, 20 10, 55 60-minute transmissions were statistically analyzed, and it was found that this transmission was a stationary white noise sequence. As shown in figure 1.
The average value is 16.67 points, and the standard deviation is 1 1.60 points. According to the principle of statistical arbitrage, the optimal trading range is 7.97 and 25.37, that is, when the spread is less than or equal to 7.97, the current month's contract is used for hedging, and when the spread is greater than or equal to 25.37, the next month's contract is used for hedging.