DAX INDEX AND FTSE 100 INDEX:

MANAGING PORTFOLIO RISK

TABLE OF CONTENTS

ABSTRACT..............................................................................................................................1
INTRODUCTION....................................................................................................................2
LITERATURE REVIEW........................................................................................................4
METHODOLOGY.................................................................................................................. 5
DATA.........................................................................................................................................6
RESULT AND DISCUSSION.................................................................................................7
CONCLUSION...................................................................................................................... 25
REFERENCES.......................................................................................................................26
ABSTRACT

This project investigates the hedge ratio and hedging effectiveness of DAX Index and FTSE
100 Index using period of three years as well as breaking it down into each year. There are
several methods used which are regression analysis and minimum variance hedge ratio
(MVHR). The results obtained were to determine the percentage of investment that is
protected from risk as well as the percentage that remains exposed to risk. Other than that, it
is also used to identify the percentage of risk that is eliminated by hedging. After analyzing
the respective indices, it is proven that the hedge ratio for DAX Index is higher than FTSE
100 Index. Likewise, it can be said the same for the hedge effectiveness of the respective
indices. In addition, when comparing between each year of the respective indices, the result
of hedge ratio and hedge effectiveness varies in term of the year that gives highest and lowest
value. The analysis of this project provides significant financial tool for investor to avoid risk
at time they wish to pursue investment in the market.

1
INTRODUCTION

The DAX Index which is known as Deutscher Aktienindex, is the benchmark index
for the German equity market. The following index tracks the performance of 30 selected
German blue-chip stocks traded on the Frankfurt Stock Exchange, which signifies around 80
percent of the market capitalization listed in Germany. The Index is free floating and has a
base value of 1000 as of December 31, 1987.

According to Deutsche Börse who is the operator of Xetra, indicated that DAX
measures the performance of the Prime Standard’s 30 largest German companies in terms of
order book volume and market capitalization. It is the equivalent of the FT 30 and the Dow
Jones Industrial Average. Since it is considered as a small selection, it does not necessarily
represent the vitality of the economy as whole.

DAX is considered somewhat unique as it is updated with futures prices for the next
day, even after the main stock exchange has closed. Changes are made on regular review
dates, but index members can be removed if they no longer rank in the top 45 largest
companies, or added if they break the top 25. The vast majority of all shares on the Frankfurt
Exchange now trade on the all-electronic Xetra system, with a near-95% adoption rate for the
stocks of the 30 DAX members.

The FTSE 100 is an index that is known as the Financial Times Stock Exchange 100
Index and is composed of the 100 largest companies, that is categorised by market
capitalisation, are listed on the London Stock Exchange (LSE). These are often referred to as
‘blue chip’ companies, and the index is perceived as a good indication of the performance of
major companies listed in the United Kingdom.

Despite that, there are a lot of that are internationally focused companies. However,
the index's movements are a fairly weak indicator of how the UK economy is faring and are
significantly affected by the exchange rates of the pound. A more appropriate indication of
the UK economy is the FTSE 250 Index, since it contains a smaller proportion of
international companies.

2
 rd
As for the history of FTSE 100, it was launched on 3 January 1984 and had a start
value of 1,000.00. Ever since then, the make-up of the index has changed almost beyond
recognition, with mergers, takeovers and disappearing companies, underlining the index’s
purpose of acting as a indicator of market activity. With every quarter, it will change to ensure
that it still reflects the top 100 companies.

The level of the FTSE 100 is deliberated using the total market capitalisation of the
fundamental companies and the index value to produce the single figure that is quoted. Since
the total market capitalisation is affected by the individual share prices of the companies, as
share prices change throughout the day, so the index value changes. When the FTSE 100 is
‘up’ or ‘down’, the change is being quoted against the previous day’s close.

3
LITERATURE REVIEW

Hedging

The main purpose of hedging is to reduce the impact of downside price movements
on the value of investments. The effectiveness of the hedging strategy (hedging performance)
is measured by computing the risk reduction achieved by the hedging portfolio, as compared
to an unhedged portfolio. There is extensive literature concerning hedging performance
within the risk minimization context. Brailsford, Corrigan, & Heaney have identified that
hedging activity involve costs. The effectiveness of a hedge becomes relevant only in the
event when there is a significant change in the value of the hedged item. According to
Pennings and Meulenberg (1997) a determinant in explaining the success of financial futures
contracts is the hedging effectiveness of futures contracts. According to Ghosh (1993) factors
that influence the hedge construction and its effectiveness include basis risk, hedging horizon,
and correlation between changes in futures prices and cash prices.

Minimum Variance

The objective of a hedge is to minimise the risk of a given position. This risk is
represented by the variance of returns. The hedge ratio that generates the minimum portfolio
variance should be the optimal hedge ratio, which is also known as the minimum variance

hedge ratio. Hedging effectiveness is presented by regression which is R 2 statistic, where the

higher R2 represent the better hedging effectiveness. Edernigton (1979) applied this concept
in determining a risk minimising hedge ratio and derived a measure of hedging effectiveness.
Edernigton defined hedging effectiveness as the reduction in variance. Ederington apply
simple linear regression in identifying relationship between cash and future market prices.
The positive result has been obtained by deriving the hedge ratio from the model to determine
hedging effectiveness. The higher volatility of market movement will cause the improvement
in performance of dynamic hedging model in comparison to traditional hedging models when
there is relatively high correlation of the standard deviation. The OLS minimum-variance
hedging strategy will be proposed and applied in this research due to the simplicity of OLS
model and assume that the behaviour of hedge ratio is stationary. Kavussanos and Visvikis
have proven that OLS minimum-variance hedge model able to give highest hedging
effectiveness for the stationary hedge.

4
METHODOLOGY

There are several methods used in this project in order to determine the hedge ratio as well as
the hedge effectiveness. Among them are:

i. Minimum variance hedge ratio (MVHR) or optimal hedge ratio

The minimum variance hedge ratio depends on the relationship between changes in the spot
price, and changes in the futures price, during a period of time equal to the life of the hedge.
The changes in spot price and changes in future price can be calculated as inter-day return
using the following formula respectively:
∆ = −1
−1
∆ = −1
−1

∗ ∗
The minimum variance hedge ratio is indicated as ℎ and it refers to the hedge ratio that minimizes the variance. Furthermore, ℎ is
assumed to be the ratio of the average change in S for a particular change in F. Hence, the minimum variance hedge ratio can be
determined using formula:
ℎ∗ =

where is the standard deviation of ∆S, standard deviation of ∆F and is coefficient of

correlation between the two.

The variables can be estimated using the following formula:

∑2 (∑ )2

=√ −

− 1 ( − 1)

2 2
∑ (∑ )

=√ −

− 1 ( − 1)

∑ −∑ ∑
=
2 2 2
√[ ∑ − (∑ ) ][ ∑ − (∑ )2]

5
 In addition, when the linear regression of and is computed using computer generated
tools which is Microsoft Excel, the slope of the best-fit line is the optimal hedge ratio.

On the other hand, the minimum variance hedge ratio can be found manually by
computing the variance of the value of the hedged position for the hedge ratio to range from 0
to 1. The variance is computed using the formula:
2
−ℎ∗ = + ℎ∗ 2
− 2ℎ∗

The hedge ratio that minimizes the variance is then chosen.

ii. Hedge effectiveness

The hedge effectiveness is the proportion of the variance of the portfolio that is eliminated by hedging. From the regression
2
analysis of against , it is the R Square, . The value is equals to and can be determined by:
2 2
2 = ℎ∗ 2

The stated methods are used to evaluate performance of DAX Index and FTSE 100 Index by
using data from a period of three years as well as breaking down into each year. The purpose
of breaking into a smaller period is to ensure the accuracy and reliability of the results.

DATA

In this project, the market index that was selected are DAX Index as well as FTSE
100 Index. In order to analyse the respective market indexes, the historical data was needed
to be attained. The following information was obtained through www.investing.com website.
Moreover, the historical data that was obtained was of DAX major indices as well as from the
future indices. In addition, the same data was attained for FTSE 100, from the major indices
and future indices to proceed with our project. Note that the following historical data that was
collected was taken between 12 October 2015 until 10 October 2018, a period of three years
of data.

6
RESULT AND DISCUSSION

DAX INDEX (3 YEARS)

• Regression Analysis
Using the historical data collected, the change in spot price, and the change in futures
price, for each day are calculated. The daily return of the stock price was then compared with
the daily return of futures price and a graph of regression was plotted on the relationship
between them as shown in Figure 1.

DAX Regression for 3 years

0.080000

0.060000

0.040000
y = 0.9706x - 7E-06
R² = 0.9756
0.020000
S

0.000000
-0.040000 -0.020000 0.000000 0.020000 0.040000 0.060000 0.080000

-0.020000

-0.040000
ΔF

Figure 1 DAX regression of change in spot price against change in futures price for 3 years

7
SUMMARY OUTPUT

Regression Statistics
Multiple R 0.987699829
R Square 0.975550952
Adjusted R Square 0.975518655
Standard Error 0.001643037
Observations 759

ANOVA
df SS MS F Significance F
Regression 1 0.08154148 0.08154148 30205.35064 0
Residual 757 0.002043575 2.69957E-06
Total 758 0.083585055

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept -6.62911E-06 5.96432E-05 -0.111145994 0.911530039 -0.000123715 0.000110457 -0.000123715 0.000110457
X Variable 1 0.970557698 0.005584437 173.796866 0 0.959594875 0.981520522 0.959594875 0.981520522

Figure 2 Regression Analysis of DAX Index for 3 years

Based on the regression analysis, it is found that the Beta factor is 0.9706. In this
case, the Beta factor represents the optimal hedge ratio. Furthermore, the equation of the best
fit line which is also known as the regression line, is = 0.9706 − 0.000007 with the R-
square being 0.9756. The R-square, or hedge effectiveness indicates the proportion of the
variance that is eliminated by hedging. Specifically, 97.56% of risk is eliminated by hedging.

8
 • Minimum Variance Hedge Ratio (MVHR)
Based on the calculation using Microsoft Excel, it is found that volatility of spot price, = 0.010501 and volatility of futures price, = 0.010686. From the
regression analysis, we also found that the coefficient of correlation between the spot price and futures price to be = 0.987699829. By using the hedge ratio, ℎ∗
of 0.970557698, the variance is calculated and the hedge ratio with minimum variance is selected.

Table 1 MVHR of DAX Index (3 years)

Hedge Hedge Hedge

Variance Variance Variance
Ratio Ratio Ratio
0.01 1.080652E-04 0.36 4.526762E-05 0.71 1.044909E-05
0.02 1.058827E-04 0.37 4.388453E-05 0.72 9.865399E-06
0.03 1.037230E-04 0.38 4.252427E-05 0.73 9.304544E-06
0.04 1.015862E-04 0.39 4.118685E-05 0.74 8.766530E-06
0.05 9.947224E-05 0.40 3.987228E-05 0.75 8.251355E-06
0.06 9.738110E-05 0.41 3.858054E-05 0.76 7.759021E-06
0.07 9.531281E-05 0.42 3.731165E-05 0.77 7.289526E-06
0.08 9.326735E-05 0.43 3.606559E-05 0.78 6.842872E-06
0.09 9.124473E-05 0.44 3.484238E-05 0.79 6.419058E-06
0.10 8.924496E-05 0.45 3.364200E-05 0.80 6.018083E-06
0.11 8.726802E-05 0.46 3.246447E-05 0.81 5.639949E-06
0.12 8.531392E-05 0.47 3.130977E-05 0.82 5.284655E-06
0.13 8.338267E-05 0.48 3.017792E-05 0.83 4.952201E-06
0.14 8.147425E-05 0.49 2.906890E-05 0.84 4.642586E-06
0.15 7.958867E-05 0.50 2.798273E-05 0.85 4.355812E-06
0.16 7.772594E-05 0.51 2.691939E-05 0.86 4.091878E-06
0.17 7.588604E-05 0.52 2.587889E-05 0.87 3.850784E-06
0.18 7.406899E-05 0.53 2.486124E-05 0.88 3.632530E-06
0.19 7.227477E-05 0.54 2.386642E-05 0.89 3.437116E-06
0.20 7.050339E-05 0.55 2.289445E-05 0.90 3.264542E-06
0.21 6.875486E-05 0.56 2.194531E-05 0.91 3.114808E-06
0.22 6.702916E-05 0.57 2.101902E-05 0.92 2.987914E-06
0.23 6.532631E-05 0.58 2.011556E-05 0.93 2.883860E-06
0.24 6.364629E-05 0.59 1.923495E-05 0.94 2.802646E-06
0.25 6.198911E-05 0.60 1.837718E-05 0.95 2.744272E-06
0.26 6.035478E-05 0.61 1.754224E-05 0.96 2.708739E-06
0.27 5.874328E-05 0.62 1.673015E-05 0.97 2.696045E-06
0.28 5.715463E-05 0.63 1.594089E-05 0.98 2.706191E-06
0.29 5.558881E-05 0.64 1.517448E-05 0.99 2.739177E-06
0.30 5.404583E-05 0.65 1.443090E-05 1.00 2.795004E-06
0.31 5.252570E-05 0.66 1.371017E-05
0.32 5.102840E-05 0.67 1.301227E-05
0.33 4.955395E-05 0.68 1.233722E-05
0.34 4.810233E-05 0.69 1.168500E-05
0.35 4.667356E-05 0.70 1.105563E-05

9
 st
DAX INDEX (1 YEAR)

DAX Regression for 1st year

0.000080

0.000060

0.000040
S

0.000020
y = 0.9828x - 1E-05
R² = 0.9797
0.000000
-0.040000 -0.020000 0.000000 0.020000 0.040000 0.060000 0.080000
-0.000020

-0.000040
F

Figure 3 DAX regression of change in spot price against change in futures price for 1st year
SUMMARY OUTPUT

Regression Statistics
Multiple R 0.989818907
R Square 0.979741469
Adjusted R Square 0.979660758
Standard Error 0.0020457
Observations 253

ANOVA
df SS MS F Significance F
Regression 1 0.050799686 0.050799686 12138.84212 1.5324E-214
Residual 251 0.001050407 4.18489E-06
Total 252 0.051850093

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept -1.29398E-05 0.000128613 -0.10060996 0.919940407 -0.000266238 0.000240359 -0.000266238 0.000240359
X Variable 1 0.982825145 0.008920468 110.1764136 1.5324E-214 0.965256638 1.000393651 0.965256638 1.000393651

Figure 4 Regression Analysis of DAX Index for 1st year

Based on the regression analysis, it is found that the optimal hedge ratio.is 0.9828. Furthermore, the equation of the best fit line
which is also known as the regression line, is = 0.9828 − 0.00001 with the R-square being 0.9797. Specifically, 97.79% of risk is
eliminated by hedging.

10
Based on the calculation using Microsoft Excel, it is found that volatility of spot price, = 0.014344 and volatility of futures price, = 0.014446. From the
regression analysis, we also found that the coefficient of correlation between the spot price and futures price to be = 0.989818907. By using the hedge ratio, ℎ∗
of 0.982825145, the variance is calculated and the hedge ratio with minimum variance is selected.

Table 2 MVHR of DAX Index (1st year)

Hedge Hedge Hedge

Variance Variance Variance
Ratio Ratio Ratio
0.01 2.016730E-04 0.36 8.512264E-05 0.71 1.970205E-05
0.02 1.976335E-04 0.37 8.254392E-05 0.72 1.858418E-05
0.03 1.936356E-04 0.38 8.000695E-05 0.73 1.750806E-05
0.04 1.896795E-04 0.39 7.751171E-05 0.74 1.647367E-05
0.05 1.857652E-04 0.40 7.505821E-05 0.75 1.548102E-05
0.06 1.818926E-04 0.41 7.264645E-05 0.76 1.453011E-05
0.07 1.780617E-04 0.42 7.027642E-05 0.77 1.362094E-05
0.08 1.742726E-04 0.43 6.794814E-05 0.78 1.275350E-05
0.09 1.705252E-04 0.44 6.566159E-05 0.79 1.192781E-05
0.10 1.668195E-04 0.45 6.341679E-05 0.80 1.114385E-05
0.11 1.631556E-04 0.46 6.121372E-05 0.81 1.040164E-05
0.12 1.595334E-04 0.47 5.905239E-05 0.82 9.701156E-06
0.13 1.559530E-04 0.48 5.693280E-05 0.83 9.042416E-06
0.14 1.524143E-04 0.49 5.485494E-05 0.84 8.425415E-06
0.15 1.489173E-04 0.50 5.281883E-05 0.85 7.850152E-06
0.16 1.454621E-04 0.51 5.082445E-05 0.86 7.316627E-06
0.17 1.420486E-04 0.52 4.887182E-05 0.87 6.824841E-06
0.18 1.386768E-04 0.53 4.696092E-05 0.88 6.374794E-06
0.19 1.353468E-04 0.54 4.509176E-05 0.89 5.966486E-06
0.20 1.320586E-04 0.55 4.326434E-05 0.90 5.599916E-06
0.21 1.288120E-04 0.56 4.147865E-05 0.91 5.275085E-06
0.22 1.256072E-04 0.57 3.973471E-05 0.92 4.991992E-06
0.23 1.224442E-04 0.58 3.803250E-05 0.93 4.750638E-06
0.24 1.193228E-04 0.59 3.637204E-05 0.94 4.551022E-06
0.25 1.162433E-04 0.60 3.475331E-05 0.95 4.393145E-06
0.26 1.132054E-04 0.61 3.317632E-05 0.96 4.277007E-06
0.27 1.102093E-04 0.62 3.164107E-05 0.97 4.202607E-06
0.28 1.072550E-04 0.63 3.014756E-05 0.98 4.169946E-06
0.29 1.043423E-04 0.64 2.869578E-05 0.99 4.179024E-06
0.30 1.014714E-04 0.65 2.728575E-05 1.00 4.229840E-06
0.31 9.864230E-05 0.66 2.591745E-05
0.32 9.585489E-05 0.67 2.459089E-05
0.33 9.310922E-05 0.68 2.330607E-05
0.34 9.040529E-05 0.69 2.206299E-05
0.35 8.774310E-05 0.70 2.086165E-05

11
 nd
DAX INDEX (2 YEAR)

DAX Regression for 2nd year

0.030000

0.020000

0.010000

0.000000
S

-0.040000 -0.030000 -0.020000 -0.010000 0.000000 0.010000 0.020000 0.030000

-0.010000

-0.020000

-0.030000 y = 0.9885x - 6E-06

R² = 0.9725
-0.040000
F

Figure 5 DAX regression of change in spot price against change in futures price for 2nd year

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.986130311
R Square 0.972452991
Adjusted R Square 0.972343677
Standard Error 0.00114441
Observations 254

ANOVA
df SS MS F Significance F
Regression 1 0.011650865 0.011650865 8895.998479 1.4329E-198
Residual 252 0.000330038 1.30967E-06
Total 253 0.011980903

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept -5.54492E-06 7.22982E-05 -0.07669509 0.938926966 -0.000147931 0.000136841 -0.000147931 0.000136841
X Variable 1 0.988493331 0.010480365 94.31860092 1.4329E-198 0.967853067 1.009133596 0.967853067 1.009133596

Figure 6 Regression Analysis of DAX Index for 2nd year

Based on the regression analysis, it is found that the optimal hedge ratio is 0.9885.
Furthermore, the regression line, is = 0.9885 − 0.000006 with the R-square being 0.9725. The R-
square, or hedge effectiveness indicates the proportion of the variance that is eliminated by hedging.
Specifically, 97.25% of risk is eliminated by hedging.

12
Based on the calculation using Microsoft Excel, it is found that volatility of spot price, = 0.006882 and volatility of futures price, = 0.006865. From the
regression analysis, we also found that the coefficient of correlation between the spot price and futures price to be = 0.986130311. By using the hedge ratio, ℎ∗
of 0.988493331, the variance is calculated and the hedge ratio with minimum variance is selected.

Table 3 MVHR of DAX Index (2nd year)

Hedge Hedge Hedge

Variance Variance Variance
Ratio Ratio Ratio
0.01 4.642684E-05 0.36 1.986733E-05 0.71 4.854482E-06
0.02 4.550776E-05 0.37 1.927816E-05 0.72 4.595208E-06
0.03 4.459810E-05 0.38 1.869840E-05 0.73 4.345361E-06
0.04 4.369787E-05 0.39 1.812808E-05 0.74 4.104939E-06
0.05 4.280707E-05 0.40 1.756718E-05 0.75 3.873943E-06
0.06 4.192569E-05 0.41 1.701570E-05 0.76 3.652373E-06
0.07 4.105373E-05 0.42 1.647365E-05 0.77 3.440229E-06
0.08 4.019121E-05 0.43 1.594103E-05 0.78 3.237510E-06
0.09 3.933811E-05 0.44 1.541783E-05 0.79 3.044218E-06
0.10 3.849443E-05 0.45 1.490406E-05 0.80 2.860351E-06
0.11 3.766018E-05 0.46 1.439972E-05 0.81 2.685910E-06
0.12 3.683536E-05 0.47 1.390480E-05 0.82 2.520895E-06
0.13 3.601996E-05 0.48 1.341930E-05 0.83 2.365306E-06
0.14 3.521399E-05 0.49 1.294324E-05 0.84 2.219142E-06
0.15 3.441744E-05 0.50 1.247659E-05 0.85 2.082405E-06
0.16 3.363032E-05 0.51 1.201938E-05 0.86 1.955093E-06
0.17 3.285262E-05 0.52 1.157159E-05 0.87 1.837207E-06
0.18 3.208435E-05 0.53 1.113322E-05 0.88 1.728748E-06
0.19 3.132551E-05 0.54 1.070428E-05 0.89 1.629713E-06
0.20 3.057609E-05 0.55 1.028477E-05 0.90 1.540105E-06
0.21 2.983610E-05 0.56 9.874684E-06 0.91 1.459923E-06
0.22 2.910554E-05 0.57 9.474023E-06 0.92 1.389166E-06
0.23 2.838440E-05 0.58 9.082788E-06 0.93 1.327835E-06
0.24 2.767268E-05 0.59 8.700979E-06 0.94 1.275930E-06
0.25 2.697040E-05 0.60 8.328595E-06 0.95 1.233451E-06
0.26 2.627753E-05 0.61 7.965637E-06 0.96 1.200398E-06
0.27 2.559410E-05 0.62 7.612106E-06 0.97 1.176771E-06
0.28 2.492009E-05 0.63 7.268000E-06 0.98 1.162569E-06
0.29 2.425550E-05 0.64 6.933319E-06 0.99 1.157793E-06
0.30 2.360034E-05 0.65 6.608065E-06 1.00 1.162444E-06
0.31 2.295461E-05 0.66 6.292236E-06
0.32 2.231830E-05 0.67 5.985834E-06
0.33 2.169142E-05 0.68 5.688857E-06
0.34 2.107397E-05 0.69 5.401306E-06
0.35 2.046594E-05 0.70 5.123181E-06

13
 rd
DAX INDEX (3 YEAR)

DAX Regression for 3rd year

0.040000

0.030000

0.020000

0.010000
S

0.000000
-0.040000 -0.030000 -0.020000 -0.010000 0.000000 0.010000 0.020000 0.030000 0.040000
-0.010000
y = 0.9309x + 3E-05
-0.020000 R² = 0.9684

-0.030000

-0.040000
F

Figure 7 DAX regression of change in spot price against change in futures price for 3rd year

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.984078006
R Square 0.968409522
Adjusted R Square 0.968282141
Standard Error 0.001577126
Observations 250

ANOVA
df SS MS F Significance F
Regression 1 0.018909821 0.018909821 7602.46695 4.5306E-188
Residual 248 0.000616857 2.48733E-06
Total 249 0.019526678

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 3.00886E-05 9.98629E-05 0.301299446 0.763438637 -0.000166599 0.000226776 -0.000166599 0.000226776
X Variable 1 0.930929516 0.010676761 87.19212665 4.5306E-188 0.909900827 0.951958205 0.909900827 0.951958205

Figure 8 Regression Analysis of DAX Index for 3rd year

Based on the regression analysis, it is found that the optimal hedge ratio is 0.9309.
Furthermore, the regression line, is = 0.9309 − 0.00003 with the R-square being 0.9684. The R-
square, or hedge effectiveness indicates the proportion of the variance that is eliminated by hedging.
Specifically, 96.84% of risk is eliminated by hedging.

14
Based on the calculation using Microsoft Excel, it is found that volatility of spot price, = 0.008856 and volatility of futures price, = 0.009361. From the
regression analysis, we also found that the coefficient of correlation between the spot price and futures price to be = 0.984078006. By using the hedge ratio, ℎ∗
of 0.930929516, the variance is calculated and the hedge ratio with minimum variance is selected.

Table 4 MVHR of DAX Index (3rd year)

Hedge Hedge Hedge

Variance Variance Variance
Ratio Ratio Ratio
0.01 7.679760E-05 0.36 3.104137E-05 0.71 6.754561E-06
0.02 7.519234E-05 0.37 3.004952E-05 0.72 6.376122E-06
0.03 7.360460E-05 0.38 2.907519E-05 0.73 6.015208E-06
0.04 7.203439E-05 0.39 2.811839E-05 0.74 5.671821E-06
0.05 7.048170E-05 0.40 2.717912E-05 0.75 5.345960E-06
0.06 6.894654E-05 0.41 2.625737E-05 0.76 5.037624E-06
0.07 6.742891E-05 0.42 2.535315E-05 0.77 4.746815E-06
0.08 6.592880E-05 0.43 2.446645E-05 0.78 4.473532E-06
0.09 6.444622E-05 0.44 2.359728E-05 0.79 4.217775E-06
0.10 6.298117E-05 0.45 2.274564E-05 0.80 3.979544E-06
0.11 6.153364E-05 0.46 2.191152E-05 0.81 3.758839E-06
0.12 6.010363E-05 0.47 2.109493E-05 0.82 3.555660E-06
0.13 5.869115E-05 0.48 2.029586E-05 0.83 3.370008E-06
0.14 5.729620E-05 0.49 1.951433E-05 0.84 3.201881E-06
0.15 5.591878E-05 0.50 1.875031E-05 0.85 3.051280E-06
0.16 5.455888E-05 0.51 1.800383E-05 0.86 2.918206E-06
0.17 5.321651E-05 0.52 1.727487E-05 0.87 2.802657E-06
0.18 5.189166E-05 0.53 1.656343E-05 0.88 2.704635E-06
0.19 5.058434E-05 0.54 1.586952E-05 0.89 2.624138E-06
0.20 4.929454E-05 0.55 1.519314E-05 0.90 2.561168E-06
0.21 4.802227E-05 0.56 1.453428E-05 0.91 2.515724E-06
0.22 4.676753E-05 0.57 1.389295E-05 0.92 2.487806E-06
0.23 4.553031E-05 0.58 1.326915E-05 0.93 2.477413E-06
0.24 4.431062E-05 0.59 1.266287E-05 0.94 2.484547E-06
0.25 4.310846E-05 0.60 1.207412E-05 0.95 2.509207E-06
0.26 4.192382E-05 0.61 1.150289E-05 0.96 2.551394E-06
0.27 4.075671E-05 0.62 1.094919E-05 0.97 2.611106E-06
0.28 3.960712E-05 0.63 1.041302E-05 0.98 2.688344E-06
0.29 3.847506E-05 0.64 9.894368E-06 0.99 2.783108E-06
0.30 3.736053E-05 0.65 9.393246E-06 1.00 2.895399E-06
0.31 3.626352E-05 0.66 8.909650E-06
0.32 3.518404E-05 0.67 8.443580E-06
0.33 3.412208E-05 0.68 7.995036E-06
0.34 3.307765E-05 0.69 7.564019E-06
0.35 3.205074E-05 0.70 7.150527E-06

15
FTSE 100 INDEX (3 YEARS)

• Regression Analysis

FTSE 100 Regression for 3 years

0.04

0.03
y = 0.9417x - 7E-06
0.02 R² = 0.9303

0.01

0
ΔS

-0.040000 -0.030000 -0.020000 -0.010000 0.000000 0.010000 0.020000 0.030000 0.040000 0.050000
-0.01

-0.02

-0.03

-0.04
ΔF

Figure 9 FTSE 100 regression of change in spot price against change in futures price for 3 years
SUMMARY OUTPUT

Regression Statistics
Multiple R 0.964529072
R Square 0.93031633
Adjusted R Square 0.930224156
Standard Error 0.002191194
Observations 758

ANOVA
df SS MS F Significance F
Regression 1 0.048459947 0.048459947 10093.02682 0
Residual 756 0.003629805 4.80133E-06
Total 757 0.052089752

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept -6.60393E-06 7.95953E-05 -0.082968796 0.933898314 -0.000162858 0.00014965 -0.000162858 0.00014965
X Variable 1 0.941678594 0.009373289 100.4640574 0 0.923277827 0.96007936 0.923277827 0.96007936

Figure 10 Regression Analysis of FTSE 100 Index for 3 years

Based on the regression analysis, it is found that the optimal hedge ratio is 0.9417.
Furthermore, the regression line, is = 0.9417 − 0.000007 with the R-square being 0.9303. The R-
square, or hedge effectiveness indicates the proportion of the variance that is eliminated by hedging.
Specifically, 93.03% of risk is eliminated by hedging.

16
 • Minimum Variance Hedge Ratio (MVHR)
Based on the calculation using Microsoft Excel, it is found that volatility of spot price, = 0.008295 and volatility of futures price, = 0.008497. From the
regression analysis, we also found that the coefficient of correlation between the spot price and futures price to be = 0.964529072. By using the hedge ratio, ℎ∗
of 0.941678594, the variance is calculated and the hedge ratio with minimum variance is selected.

Table 5 MVHR of FTSE 100 Index (3 years)

Hedge Hedge Hedge

Variance Variance Variance
Ratio Ratio Ratio
0.01 6.745838E-05 0.36 2.922073E-05 0.71 8.669824E-06
0.02 6.612043E-05 0.37 2.838811E-05 0.72 8.342542E-06
0.03 6.479691E-05 0.38 2.756994E-05 0.73 8.029698E-06
0.04 6.348783E-05 0.39 2.676619E-05 0.74 7.731293E-06
0.05 6.219320E-05 0.40 2.597689E-05 0.75 7.447325E-06
0.06 6.091300E-05 0.41 2.520203E-05 0.76 7.177796E-06
0.07 5.964723E-05 0.42 2.444160E-05 0.77 6.922704E-06
0.08 5.839591E-05 0.43 2.369561E-05 0.78 6.682051E-06
0.09 5.715902E-05 0.44 2.296406E-05 0.79 6.455836E-06
0.10 5.593658E-05 0.45 2.224695E-05 0.80 6.244059E-06
0.11 5.472857E-05 0.46 2.154428E-05 0.81 6.046721E-06
0.12 5.353500E-05 0.47 2.085604E-05 0.82 5.863820E-06
0.13 5.235586E-05 0.48 2.018224E-05 0.83 5.695358E-06
0.14 5.119117E-05 0.49 1.952288E-05 0.84 5.541334E-06
0.15 5.004091E-05 0.50 1.887796E-05 0.85 5.401748E-06
0.16 4.890509E-05 0.51 1.824748E-05 0.86 5.276600E-06
0.17 4.778371E-05 0.52 1.763143E-05 0.87 5.165890E-06
0.18 4.667677E-05 0.53 1.702983E-05 0.88 5.069619E-06
0.19 4.558427E-05 0.54 1.644266E-05 0.89 4.987785E-06
0.20 4.450620E-05 0.55 1.586993E-05 0.90 4.920390E-06
0.21 4.344257E-05 0.56 1.531163E-05 0.91 4.867433E-06
0.22 4.239338E-05 0.57 1.476778E-05 0.92 4.828914E-06
0.23 4.135863E-05 0.58 1.423836E-05 0.93 4.804833E-06
0.24 4.033832E-05 0.59 1.372338E-05 0.94 4.795190E-06
0.25 3.933244E-05 0.60 1.322284E-05 0.95 4.799986E-06
0.26 3.834100E-05 0.61 1.273674E-05 0.96 4.819219E-06
0.27 3.736401E-05 0.62 1.226508E-05 0.97 4.852891E-06
0.28 3.640144E-05 0.63 1.180785E-05 0.98 4.901001E-06
0.29 3.545332E-05 0.64 1.136507E-05 0.99 4.963549E-06
0.30 3.451964E-05 0.65 1.093672E-05 1.00 5.040536E-06
0.31 3.360039E-05 0.66 1.052281E-05
0.32 3.269558E-05 0.67 1.012333E-05
0.33 3.180521E-05 0.68 9.738299E-06
0.34 3.092928E-05 0.69 9.367703E-06
0.35 3.006779E-05 0.70 9.011544E-06

17
 st
FTSE 100 INDEX (1 YEAR)

FTSE 100 Regression for 1st year

0.040000

0.030000

0.020000
y = 0.9576x - 2E-05
0.010000 R² = 0.9449

0.000000
S

-0.040000 -0.030000 -0.020000 -0.010000 0.000000 0.010000 0.020000 0.030000 0.040000 0.050000
-0.010000

-0.020000

-0.030000

-0.040000
ΔF

Figure 11 FTSE 100 regression of change in spot price against change in futures price for 1st year

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.972041414
R Square 0.944864511
Adjusted R Square 0.944644848
Standard Error 0.002607769
Observations 253

ANOVA
df SS MS F Significance F
Regression 1 0.029251633 0.029251633 4301.42176 5.801E-160
Residual 251 0.001706915 6.80046E-06
Total 252 0.030958548

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept -2.42386E-05 0.000164024 -0.147774466 0.882639399 -0.000347278 0.000298801 -0.000347278 0.000298801
0.957632258 0.014601341 65.58522517 5.801E-160 0.928875497 0.986389019 0.928875497 0.986389019

Figure 12 Regression Analysis of FTSE 100 Index for 1st year

Based on the regression analysis, it is found that the optimal hedge ratio is 0.9576.
Furthermore, the regression line, is = 0.9576 − 0.00002 with the R-square being 0.9449. The R-
square, or hedge effectiveness indicates the proportion of the variance that is eliminated by hedging.
Specifically, 94.49% of risk is eliminated by hedging.

18
Based on the calculation using Microsoft Excel, it is found that volatility of spot price, = 0.011084 and volatility of futures price, = 0.011251. From the
regression analysis, we also found that the coefficient of correlation between the spot price and futures price to be = 0.972041414. By using the hedge ratio, ℎ∗
of 0.957632258, the variance is calculated and the hedge ratio with minimum variance is selected.

Table 6 MVHR of FTSE 100 Index (1st year)

Hedge Hedge Hedge

Variance Variance Variance
Ratio Ratio Ratio
0.01 1.204398E-04 0.36 5.198197E-05 0.71 1.453534E-05
0.02 1.180535E-04 0.37 5.048171E-05 0.72 1.392111E-05
0.03 1.156925E-04 0.38 4.900676E-05 0.73 1.333220E-05
0.04 1.133568E-04 0.39 4.755713E-05 0.74 1.276860E-05
0.05 1.110465E-04 0.40 4.613281E-05 0.75 1.223032E-05
0.06 1.087614E-04 0.41 4.473381E-05 0.76 1.171735E-05
0.07 1.065017E-04 0.42 4.336012E-05 0.77 1.122970E-05
0.08 1.042673E-04 0.43 4.201175E-05 0.78 1.076736E-05
0.09 1.020582E-04 0.44 4.068870E-05 0.79 1.033033E-05
0.10 9.987445E-05 0.45 3.939096E-05 0.80 9.918627E-06
0.11 9.771599E-05 0.46 3.811853E-05 0.81 9.532235E-06
0.12 9.558285E-05 0.47 3.687142E-05 0.82 9.171158E-06
0.13 9.347502E-05 0.48 3.564962E-05 0.83 8.835396E-06
0.14 9.139251E-05 0.49 3.445314E-05 0.84 8.524950E-06
0.15 8.933531E-05 0.50 3.328198E-05 0.85 8.239819E-06
0.16 8.730343E-05 0.51 3.213613E-05 0.86 7.980003E-06
0.17 8.529686E-05 0.52 3.101560E-05 0.87 7.745502E-06
0.18 8.331561E-05 0.53 2.992038E-05 0.88 7.536316E-06
0.19 8.135967E-05 0.54 2.885047E-05 0.89 7.352446E-06
0.20 7.942905E-05 0.55 2.780589E-05 0.90 7.193891E-06
0.21 7.752374E-05 0.56 2.678661E-05 0.91 7.060651E-06
0.22 7.564375E-05 0.57 2.579265E-05 0.92 6.952726E-06
0.23 7.378907E-05 0.58 2.482401E-05 0.93 6.870117E-06
0.24 7.195971E-05 0.59 2.388068E-05 0.94 6.812823E-06
0.25 7.015567E-05 0.60 2.296267E-05 0.95 6.780844E-06
0.26 6.837694E-05 0.61 2.206997E-05 0.96 6.774180E-06
0.27 6.662352E-05 0.62 2.120259E-05 0.97 6.792832E-06
0.28 6.489542E-05 0.63 2.036053E-05 0.98 6.836799E-06
0.29 6.319264E-05 0.64 1.954378E-05 0.99 6.906081E-06
0.30 6.151517E-05 0.65 1.875234E-05 1.00 7.000678E-06
0.31 5.986301E-05 0.66 1.798622E-05
0.32 5.823617E-05 0.67 1.724541E-05
0.33 5.663465E-05 0.68 1.652992E-05
0.34 5.505844E-05 0.69 1.583975E-05
0.35 5.350755E-05 0.70 1.517489E-05

19
 nd
FTSE 100 INDEX (2 YEAR)

FTSE 100 Regression for 2nd year

0.030000

0.020000

0.010000 y = 0.9421x - 1E-05

R² = 0.9023

0.000000
S

-0.025000 -0.020000 -0.015000 -0.010000 -0.005000 0.000000 0.005000 0.010000 0.015000 0.020000 0.025000

-0.010000

-0.020000

-0.030000 ΔF

Figure 13 FTSE 100 regression of change in spot price against change in futures price for 2nd year

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.949874074
R Square 0.902260756
Adjusted R Square 0.901869799
Standard Error 0.001828204
Observations 252

ANOVA
df SS MS F Significance F
Regression 1 0.00771352 0.00771352 2307.826219 3.043E-128
Residual 250 0.000835583 3.34233E-06
Total 251 0.008549103

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept -1.19714E-05 0.000115283 -0.103843746 0.917376606 -0.000239021 0.000215078 -0.000239021 0.000215078
0.942123601 0.019611298 48.03983991 3.043E-128 0.903499182 0.980748021 0.903499182 0.980748021

Figure 14 Regression Analysis of FTSE 100 Index for 2nd year

Based on the regression analysis, it is found that the optimal hedge ratio is 0.9421.
Furthermore, the regression line, is = 0.9309 − 0.00001 with the R-square being 0.9023. The R-
square, or hedge effectiveness indicates the proportion of the variance that is eliminated by hedging.
Specifically, 90.23% of risk is eliminated by hedging.

20
Based on the calculation using Microsoft Excel, it is found that volatility of spot price, = 0.005836and volatility of futures price, = 0.005884. From the
regression analysis, we also found that the coefficient of correlation between the spot price and futures price to be = 0.949874074. By using the hedge ratio, ℎ∗
of 0.942123601, the variance is calculated and the hedge ratio with minimum variance is selected.

Table 7 MVHR of FTSE 100 Index (2nd year)

Hedge Hedge Hedge

Variance Variance Variance
Ratio Ratio Ratio
0.01 3.341125E-05 0.36 1.506160E-05 0.71 5.194543E-06
0.02 3.276926E-05 0.37 1.466196E-05 0.72 5.037270E-06
0.03 3.213419E-05 0.38 1.426925E-05 0.73 4.886921E-06
0.04 3.150605E-05 0.39 1.388347E-05 0.74 4.743497E-06
0.05 3.088483E-05 0.40 1.350461E-05 0.75 4.606997E-06
0.06 3.027053E-05 0.41 1.313267E-05 0.76 4.477422E-06
0.07 2.966316E-05 0.42 1.276766E-05 0.77 4.354771E-06
0.08 2.906271E-05 0.43 1.240958E-05 0.78 4.239045E-06
0.09 2.846919E-05 0.44 1.205842E-05 0.79 4.130244E-06
0.10 2.788259E-05 0.45 1.171418E-05 0.80 4.028367E-06
0.11 2.730292E-05 0.46 1.137687E-05 0.81 3.933415E-06
0.12 2.673017E-05 0.47 1.104648E-05 0.82 3.845387E-06
0.13 2.616435E-05 0.48 1.072302E-05 0.83 3.764284E-06
0.14 2.560545E-05 0.49 1.040648E-05 0.84 3.690105E-06
0.15 2.505348E-05 0.50 1.009686E-05 0.85 3.622851E-06
0.16 2.450843E-05 0.51 9.794173E-06 0.86 3.562522E-06
0.17 2.397030E-05 0.52 9.498408E-06 0.87 3.509117E-06
0.18 2.343910E-05 0.53 9.209567E-06 0.88 3.462637E-06
0.19 2.291483E-05 0.54 8.927652E-06 0.89 3.423081E-06
0.20 2.239748E-05 0.55 8.652660E-06 0.90 3.390450E-06
0.21 2.188705E-05 0.56 8.384594E-06 0.91 3.364744E-06
0.22 2.138355E-05 0.57 8.123452E-06 0.92 3.345962E-06
0.23 2.088697E-05 0.58 7.869234E-06 0.93 3.334104E-06
0.24 2.039732E-05 0.59 7.621941E-06 0.94 3.329172E-06
0.25 1.991459E-05 0.60 7.381573E-06 0.95 3.331163E-06
0.26 1.943878E-05 0.61 7.148129E-06 0.96 3.340080E-06
0.27 1.896990E-05 0.62 6.921610E-06 0.97 3.355921E-06
0.28 1.850795E-05 0.63 6.702015E-06 0.98 3.378686E-06
0.29 1.805292E-05 0.64 6.489345E-06 0.99 3.408376E-06
0.30 1.760481E-05 0.65 6.283600E-06 1.00 3.444991E-06
0.31 1.716363E-05 0.66 6.084779E-06
0.32 1.672938E-05 0.67 5.892883E-06
0.33 1.630204E-05 0.68 5.707911E-06
0.34 1.588164E-05 0.69 5.529864E-06
0.35 1.546815E-05 0.70 5.358741E-06

21
 rd
FTSE 100 INDEX (3 YEAR)

FTSE 100 Regression for 3rd year

0.030000

0.020000

y = 0.9046x + 3E-05
0.010000 R² = 0.9151

0.000000
S

-0.030000 -0.020000 -0.010000 0.000000 0.010000 0.020000 0.030000 0.040000

-0.010000

-0.020000

-0.030000
F

Figure 15 FTSE 100 regression of change in spot price against change in futures price for 3rd year

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.95661492
R Square 0.915112105
Adjusted R Square 0.91477119
Standard Error 0.002062303
Observations 251

ANOVA
df SS MS F Significance F
Regression 1 0.011416494 0.011416494 2684.280419 2.311E-135
Residual 249 0.00105902 4.25309E-06
Total 250 0.012475514

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 2.66424E-05 0.000130241 0.204562419 0.838081128 -0.000229872 0.000283157 -0.000229872 0.000283157
0.904565724 0.017459274 51.81004168 2.311E-135 0.87017904 0.938952409 0.87017904 0.938952409

Figure 16 Regression Analysis of FTSE 100 Index for 3rd year

Based on the regression analysis, it is found that the optimal hedge ratio is 0.9046.
Furthermore, the regression line, is = 0.9046 − 0.00003 with the R-square being 0.9151. The R-
square, or hedge effectiveness indicates the proportion of the variance that is eliminated by hedging.
Specifically, 91.51% of risk is eliminated by hedging.

22
Based on the calculation using Microsoft Excel, it is found that volatility of spot price, = 0.007064and volatility of futures price, = 0.007471. From the
regression analysis, we also found that the coefficient of correlation between the spot price and futures price to be = 0.95661492. By using the hedge ratio, ℎ∗
of 0.904565724, the variance is calculated and the hedge ratio with minimum variance is selected.

Table 8 MVHR of FTSE 100 Index (3rd year)

Hedge Hedge Hedge

Variance Variance Variance
Ratio Ratio Ratio
0.01 4.889796E-05 0.36 2.078666E-05 0.71 6.348816E-06
0.02 4.790503E-05 0.37 2.018439E-05 0.72 6.137223E-06
0.03 4.692325E-05 0.38 1.959329E-05 0.73 5.936791E-06
0.04 4.595264E-05 0.39 1.901335E-05 0.74 5.747522E-06
0.05 4.499320E-05 0.40 1.844457E-05 0.75 5.569414E-06
0.06 4.404491E-05 0.41 1.788696E-05 0.76 5.402469E-06
0.07 4.310778E-05 0.42 1.734050E-05 0.77 5.246685E-06
0.08 4.218182E-05 0.43 1.680521E-05 0.78 5.102064E-06
0.09 4.126702E-05 0.44 1.628108E-05 0.79 4.968605E-06
0.10 4.036338E-05 0.45 1.576811E-05 0.80 4.846307E-06
0.11 3.947091E-05 0.46 1.526631E-05 0.81 4.735172E-06
0.12 3.858959E-05 0.47 1.477566E-05 0.82 4.635199E-06
0.13 3.771944E-05 0.48 1.429618E-05 0.83 4.546387E-06
0.14 3.686045E-05 0.49 1.382786E-05 0.84 4.468738E-06
0.15 3.601262E-05 0.50 1.337070E-05 0.85 4.402250E-06
0.16 3.517596E-05 0.51 1.292471E-05 0.86 4.346925E-06
0.17 3.435045E-05 0.52 1.248987E-05 0.87 4.302762E-06
0.18 3.353611E-05 0.53 1.206620E-05 0.88 4.269761E-06
0.19 3.273293E-05 0.54 1.165369E-05 0.89 4.247921E-06
0.20 3.194091E-05 0.55 1.125235E-05 0.90 4.237244E-06
0.21 3.116006E-05 0.56 1.086216E-05 0.91 4.237729E-06
0.22 3.039036E-05 0.57 1.048314E-05 0.92 4.249375E-06
0.23 2.963183E-05 0.58 1.011527E-05 0.93 4.272184E-06
0.24 2.888446E-05 0.59 9.758575E-06 0.94 4.306155E-06
0.25 2.814825E-05 0.60 9.413037E-06 0.95 4.351288E-06
0.26 2.742321E-05 0.61 9.078662E-06 0.96 4.407583E-06
0.27 2.670932E-05 0.62 8.755448E-06 0.97 4.475039E-06
0.28 2.600660E-05 0.63 8.443397E-06 0.98 4.553658E-06
0.29 2.531504E-05 0.64 8.142507E-06 0.99 4.643439E-06
0.30 2.463464E-05 0.65 7.852779E-06 1.00 4.744382E-06
0.31 2.396541E-05 0.66 7.574214E-06
0.32 2.330733E-05 0.67 7.306810E-06
0.33 2.266042E-05 0.68 7.050569E-06
0.34 2.202467E-05 0.69 6.805489E-06
0.35 2.140008E-05 0.70 6.571572E-06

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 Table 9 Result of DAX Index

DAX INDEX Hedge ratio Hedge effectiveness

3 years 0.9706 0.9756

1st year 0.9828 0.9797

2nd year 0.9885 0.9725
rd
3 year 0.9309 0.9684

Table 10 Result of FTSE 100 Index

FTSE 100 INDEX Hedge ratio Hedge effectiveness

3 years 0.9417 0.9303
st
1 year 0.9576 0.9449
nd
2 year 0.9421 0.9023
rd
3 year 0.9046 0.9151

In term of analyzing DAX Index and FTSE 100 Index for 3 years, it is found that the
hedge ratio for DAX is higher, with 97.06% of the investment is protected from risk and
2.94% remains exposed to the risk. Meanwhile, FTSE 100 has only 94.17% of investment
protected from risk and 5.83% exposed to the risk. As for the hedge effectiveness, DAX
shows that 97.56% of risk are eliminated by hedging while FTSE 100 has only 93.03%. This
indicates that DAX is more effective compared to FTSE 100 when hedging is done.

Based on the result obtained, it is discovered that when comparing the hedge ratio for
each year of DAX, the highest hedge ratio was during the second year with 98.85% of the
investment is protected from risk and the lowest was during third year with 93.09%. However,
when comparing the hedge effectiveness, the first year gave the highest percentage which was
97.97% of risk is eliminated and the lowest coming from the third year with 96.84%.

As for FTSE 100, after analyzing each respective year, it was determined that the
highest hedge ratio was from the first year containing 95.76% of investment is protected from
risk and the lowest being 90.46% from third year. Furthermore, the first year secured the
highest hedge effectiveness with 94.49% of risk is eliminated by hedging, while the lowest
being 90.23% coming from the second year.

24
CONCLUSION

Based on this project, it can be concluded that DAX Index is more effective for
hedging risk compared to FTSE 100 Index. This is due to the results obtained using the spot
and futures prices of the respective index. By assessing both indices, it is proven that DAX
Index gave higher hedge ratio and hedge effectiveness when analyzing against FTSE 100
Index. Hence, this analysis provides valuable financial tool for investor to avoid risk at time
they wish to pursue investment in the market. This indicates that DAX Index is more reliable
in term of risk reduction and protection of investment which encourage investor to be more
confident in choosing DAX Index instead of FTSE 100 Index.

25
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30-futures

DAX Index (GDAXI). (n.d.). Retrieved from

https://www.investing.com/indices/germany-30

Ederington, L.H., 1979. The Hedging Performance of the New Futures Markets. Journal
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FTSE 100 Futures Quotes. (n.d.). Retrieved from https://www.investing.com/indices/uk-

100-futures

FTSE 100 Index (FTSE). (n.d.). Retrieved from https://www.investing.com/indices/uk-100

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https://www.investopedia.com/terms/d/dax.asp

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