Risks Hedging Technique from Gold Prices Fluctuation in Contract for Difference Trading
Keywords:
Hedging, Gold prices, Contract for difference tradingAbstract
This study aims to investigate what is the best investing strategy in gold market by comparing return on investment, hedging effectiveness and decreasing in standard deviation in three portfolios. The three portfolios include unhedged portfolio, optimal hedge portfolio and perfect hedge portfolio. Gold’s prices are collected from June 30, 2016 to July 3, 2017 covering 368 days. The gold’s price is employed to calculate the optimal hedging effectiveness ratio and the ratio is used to form those three portfolios. The investing period is from July 5, 2017 to September 27, 2017. The result shows that unhedged portfolio generates a highest return on investment at 12.83%. This result is due to an increasing in the gold price during the sample period. Moreover, this study indicates that the optimal hedge portfolio performs well to reduce the risk, which is measured by a decreasing of standard deviation, approximately 87.6439% and to generate a highest hedging effectiveness ratio at 0.9847. Furthermore, rate of return from optimal hedge portfolio outperforms a rate of return from perfect hedge portfolio.
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