Estimating Chinese Equity Index Futures Hedging Costs
Summary
The document discusses how to estimate hedging costs for Chinese equity index futures. It argues that raw futures premiums or discounts need adjustment for time to expiry, convergence, and expected dividends. A dividend model and quadratic equation are proposed to express costs on a standardized monthly horizon, making contracts with different maturities more comparable.
The summary reports that hedging costs had moved closer to more typical levels after trading restrictions, and that longer-dated contracts could have lower short-hedging costs than nearby contracts in the periods discussed. It also proposes historical average costs from 2011–2012 as a reference ceiling for near-month premiums. These are period-specific observations and estimates, with no underlying calculations or transaction-cost analysis included in the supplied text. In particular, the comparison of contract maturities is explicitly stated before trading costs, so it does not by itself establish the cheapest practical hedge.
Key ideas
- Futures hedging cost estimates should adjust for expiry distance, convergence, and dividends.
- A dividend model and quadratic equation are used to standardize costs to a fixed monthly horizon.
- The source reports lower short-hedging costs in longer-dated than nearby contracts during selected historical periods.
- It suggests historical average costs as a reference upper bound for nearby premiums.
- The maturity comparison excludes transaction costs, and the supplied summary omits supporting calculations.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.