Research On The Hedging Of Shanghai Copper Futures Based On The Minimization Of Variance

Manufacturing industry is facing the uncertainty of raw material and product price changes due to large fluctuation in copper price in Nonferrous Metals Market during the last three years,which makes how to deal with the risk become a difficult problem in manufacturing production and business operation.Normally,risk can be reduced through copper futures market hedging,by using the futures market to open a futures position.Firstly,the futures hedging related literature at home and abroad is summarized and evolution of minimum variance hedging theory and models OLS,ECM and BEKK-GARCH are illustrated.Based on this,researches are made on copper purchase prices and futures prices of 12 contacts.Later,the optimal hedging ratio is calculated and comparison among three common models is made.At last,ECM is chosen as the optimal model and hedging solutions for ABC company is made based on that.The paper considers variance as risk indicator and is based on minimum variance hedging theory.It studies the relationship between copper futures prices of 12 contacts and purchase prices.By using three models OLS,ECM and BEKK-GARCH respectively,the optimal hedging ratio is estimated and the performance analysis can be made.Compared with no hedging,the hedging effectiveness indicator shows that hedging strategy can significantly decrease portfolio variance and reduce the risk in fluctuation of copper purchase prices.The empirical analysis result shows that unit hedging(hedge ratio of 1)performance is significantly lower than the rest of the three methods of hedging and ECM model performs the best among them.Finally,the author makes hedging solutions for ABC company based on ECM model plus the production and operation of ABC company and comes up with possible risk and control measures.