Strategies · Library · Futures
§10.1.1Hedges and structures
Cross-hedging
A variant of §10.1 Hedging risk with futures
Use a related futures contract when the exact one is not traded. Leaves basis risk and mismatch risk; hedge ratio from regression.
- Asset class
- Futures
- Held for
- Varies
- Data
- ARCANE has part of the data
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Spot against the substitute contract.
- Entry and exit
- Short substitute at start, close at date.
- Sizing
- Regression ratio.
How it fails
- Poor correlation
- Basis risk
- Ratio drift
Data it needs
- spot and futures prices
Front futures exist.
How ARCANE uses it
Background only.
A hedge, not a long-only allocation.
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §10.1.1, p. 94 of the SSRN version. Described in our words. Hedges and structures is ARCANE’s filing, not the book’s.