The purpose of this study is to examine the necessity and feasibility of introducing stock index futures in the Korean Stock Market, to select possible underlying index of futures contract, to analyse potential hedging effect of futures contract and to suggest practical hedging strategy for risk averse investors.
As there is no futures market in Korea now, theoretical prices of futures contracts are used in analysing hedging effect of each cases.
The results show that, of four major indexes, maekyeong index and hankyeong dow index represents the best potential hedging effect for portfolios of industry groups and diversified stock portfolios, and that the introduction of stock index futures can reduce substantial risk(33-37%) in the Korean Stock Market.
On the other hand, the portfolio hedging strategy, in wide use, provides negative hedged returns for many portfolios as in other studies, so a new hedging strategy which guarantees minimum hedged returns is suggested and it turned out to have practical usefulness.