Hedging with China Stock Index Futures-risk Management in Emerging Market

This paper addresses some practical issues that are similar to what a risk manager would be facing in emerging market, where derivatives are rare and short selling is not allowed. To protect portfolio against. unexpected turbulent drop, risk managers might use stock index futures to hedge the portfolio. An investor with a large portfolio of stocks may want to hedge against a stock market decline by shorting futures contracts. In this paper, a hedging strategy is presented by shorting stock index futures. We investigate 5 different fund and compare the return and risk with our hedged portfolio. Both return and standard deviation of our hedged portfolio outperform that of the original portfolio. The return of the portfolio hedged with SFIF1012 is higher than that hedged with SFIF1009. These findings are helpful for risk managers to fully make use of the new coming China stock index futures for risk management. The results from the model by shorting the right amount of stock index future for hedging strategies may assist risk managers in making practical decisions in risk management.