An Application Of Artificial Neural Networks In The Enterprise Hedge

In the modern world, with the more and more volatile price fluctuation, hedge is becoming more and more important as a price risk management tool. But with the sub-prime crisis broke out, so many cases of great loss on hedge appeared, which deeply stung the managements'nervous of enterprises, and made a lot of business operators have a fear psychology on the hedge. After an in-depth analysis of the typical hedging loss case, this article realizes that the main reason of hedge loss is due to enterprises fail to face basis risk, cash flow risk and speculative risk. Therefore, a flexible and reliable hedge strategy is needed to achieve successful hedge. Then we construct a hedge strategy based on the prediction of artificial neural network. The strategy uses artificial neural network to predict futures prices to determine future market conditions. When the futures market price fluctuations is unfavorable, the company holds less futures hedge positions; and when the futures market price fluctuations is conducive, the company holds more hedge positions. Then, it can help enterprises to reduce hedge cost, deal with basis risk and cash flow risk successfully, and ultimately achieve successful hedge.Firstly, the strategy was constructed on crude oil futures successfully, and then expands the usage on copper futures. In order to verify its effectiveness, this paper uses the least square method and error correction - generalized autoregressive conditional heteroskedasticity model to evaluate the optimal hedge ratio of the two species and then to determine the benchmark hedge ratio and hedge ratio under the strategy adjustment. This article made some relevant statistics on the proceeds sequences under the benchmark hedge ratio and strategy hedge ratio. Results show that the hedge strategy based on the artificial neural network forecasting is effective. This strategy can effectively reduce the loss in the futures hedge position; reduce the hedge cost; and help companies achieve successful hedge. The research have important guiding significance on the company's hedging practices and can effectively inspire enterprises'bold use of futures market to hedge; and also can improve the ability of price risks management of Chinese enterprises using futures market. Meanwhile, the success of the strategy effectively opened the way of artificial neural network used in enterprise hedging practices.