Need Help- Cross-hedging cannot hedge risk totally？
- When the hedger cannot find a specific contract for the underlying assets, they will use another related underlying assets contract. But I think the cross-hedging cannot hedge risk totally.
- I think sometime the hedger will still have risk when they use the cross-hedging. Even the two different assets are related, but the two assets still different. And there will have some unexpected reason make one assets price decrease, but another assets price not change.
- I think even the two different underlying assets are related, they still different. For example because the climate change make one specific fruit price change. But another fruit will not influenced by the climate. That means the cross-hedging will not working.
- For the research I will find two different underlying assets and those two underlying assets are related. And there should have specific price of the assets and option price. And I will find in two different situation, the first one is cross-hedging can hedge the risk the second one is cannot hedge. Comparing the two situations to prove the cross-hedging cannot hedge risk totally, and why cannot hedge risk totally.
Guideline for Developing (Implementing) a Research Idea for the Class Project
A research idea is a question that intrigues you and you would like to seek the answer to. While most research ideas are those that have not had conclusions on yet, for the purpose of this class project, the question you are looking into does not have to be extremely complicated and sophisticated. It can be any small topic you find interesting. It can be a statement that has been acknowledged by most people but you still would like to verify. When writing the research idea of your interest into part of the project report, you should specify the following terms and elaborate on them,
- Research question. Describe the question that intrigues you. Explain why you find it interesting.
- Your hypothesis. Describe what answer you are anticipating and explain why.
- Hypothesis development. You can use Google and Google Scholar (https://scholar.google.com/ ) to search for the conclusions and related statements made by the mass media and other scholars. Further your explanation to your hypothesis based on the evidence you collect.
- Design an applicable framework to verify your hypothesis and provide the details of the framework (data and statistic methodology).
If you opt to implement your research idea,
- Collect the data you are using
- Implement the framework you have designed in 4.
- Put your empirical results together and discuss it in the context of your hypothesis.
Here are some examples of the “small” research questions one may want to ask and look into,
- Would a call option and a put option with the same moneyness be equally expensive?
- Would the implied volatilities from a call and a put with the same underlying, strike, and maturity be the same?
- Can futures market always predict the underlying stock market?