Modeling Strategies for Financial Hedging

The predominance of existing research related to hedging strategies relative to the futures markets is typically concerned with agricultural, foreign exchange (forex), and petroleum products. This brief research attempts to offer some insight relative to the mathematical modeling techniques which financial hedging strategists employ in order to be successful at mitigating risk. Modeling volatility within the financial markets has not received a great deal of academic attention. Siddique and Harvey undertook a study of autoregressive conditional skewness which utilized GARCH techniques wherein they concluded that autoregressive models might be successful at modeling time-series variations relative to asset pricing such as stock returns but not necessarily for futures and related hedging strategies. Their use and application of GARCH (1,1,1)-M models successfully modeled skewness in a given financial market and this has some application in the futures market both long and short strategies exist as well.