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What is hedging effectiveness?

April 26, 2017hedging

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What is hedging effectiveness?

1 Answer

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10 Posted

Suppose you have some portfolio, and you use index futures for hedging. A good index is one, which gives high hedging effectiveness, i.e. the index should correlate well with your portfolio — whatever it may be. A good index would give a very high risk reduction when a portfolio owner short sells the index futures. S&P CNX Nifty correlates better with all kinds of portfolios in India as compared with other indices. This holds for all kinds of portfolios,not just those that contain index stocks.