The purposes of this study are to investigate the hedging theory of financial futures market and examine the feasibility of introduction to Korea.
In the case study on the bond-portfolio hedging of institutional investors, several hedging strategies are tested, including naive hedge and conversion factor hedge, long-term hedge and short-term hedge, and long-term contract and short-term contract.
The hedge results are evaluated by two criteria of return effectiveness and risk effectiveness. The results indicate that every hedged position reduced significantly the risks of unhedged position. Among several strategies, conversion factor hedge, long-term hedge, and long-term contract show the superiority in hedging effectiveness.
In the feasibility study of introducing financial futures market to Korea, the yield correlations among various long and short-term financial instruments are analyzed by regression analysis to select the underlying instrument for futures contract.
The result is that the yields of those financial instruments are highly correlated, which satisfies the most significant criterion for being underlying instruments for futures contract.
These findings suggest that Korean financial market has some essential condition for introducing financial futures market.
But further studies are required for actual introduction including institutional aspects.
