# Introduction conomic development of a country to a large extent is dependent on the smooth functioning of its financial markets. A financial market that is robust is expected to foster economic growth and social welfare (Singh, 1991). Financial markets pose a great risk to the investor's in spite of its high returns. The market risk can be reduced by portfolio insurance (Wikipedia). Derivative markets help in increasing the trading volume in financial markets because the objective of trading is not only for investment purposes but also for risk management objectives of market participants (Madhumathi & Ranganatham, 2012). Adams and Montesi, (1995) found that corporate managers prefer futures to options by virtue of the large transaction costs in option trading. Investors recognize that there is a close relationship between changes in the index and changes in the values of their portfolios. This makes index futures contract is used as a tool to show how movements in the market affects the value of a portfolio (Grant, 1982). Forecasting hedge ratio is important for hedgers in derivative market, as forecasting is an important tool in decision making. (Koenker & Bassett, 1978). Hedge ratio can be determined with different models derived by econometrics -OLS, ARCH, GARCH and VECH models to name a few. Ederington (1979) and Johnson (1960) employed portfolio theory to derive the minimum variance hedge ratio (HR) as the "average relationship between the changes in the cash price and the changes in the futures price". Engle (1982) suggested ARCH model. If an autoregressive moving average model (ARMA model) is assumed for the error variance, then the model is known as generalized autoregressive conditional heteroskedasticity GARCH model (Bollerslev 1986). Individual and institutional investors are exposed to equity risk. Predicting the movement of market is not an easy task as rightly proved by the Nobel laureate (Eugene Fama, 2013Fama, & 1966)). Stock prices are extremely difficult to predict in the short run, and that new information is very quickly incorporated into prices. In order to minimize the risk due to the adverse movement in the market there is a need for the investors to protect their portfolio value. For investors in India it is even more challenging as the volatility in Indian market is not constant and it varies over time (Securities and Exchange Board of India, 1998). Mary & Vishwanath, (2013) proved that in high PE stock portfolios, capital can be protected by hedging. With this bckground, this research examines whether hedging the portfolio with Index futures gives economic benefit to the investors. II. # Research Methodology a) Data collection The research is done with only secondary data obtained from periodicals, journals, website and magazines. Period of study is from January 2008 -December 2012 and daily stock and nifty index futures closing prices were taken. 2007 data is used for determining the hedge ratio. # Year ( ) # C c) Sampling Framework Based on prefixed parameter ten High Market cap stocks are drawn from the population using a non probability sampling technique, judgement sampling method. The sample consists of 10 stocks constituting a portfolio worth 1 crore (10 million) rupees. Each stock is given an equal weightage of rupees 10 lakhs (1 million) worth. Hedging Effectiveness Analysis of High Market Cap Indian Stocks Using OLS and GARCH Hedge Ratios As on 1/1/2008 the portfolio was constructed for 1 crore rupees by giving equal weightage of 10 lakhs (1 million) rupees to each stock. Number of shares bought for a value of 10 lakhs for each stock is as follows: ii. Hedged Portfolio return The number of nifty futures contract required to hedge the portfolio worth Rupees 1 crore is determined by calculating the hedge ratio. In this study hedge ratio is obtained using two different econometric methods i) Ordinary Least squares -OLS ii) GARCH , and the results are compared to find out the method which gives better returns. The hedge ratio for 2/1/2008 is calculated using previous one year data i.e daily closing price of stock and closing price of nifty index futures from 1/1/2007 to 31/12/2007. Hedge ratio is calculated for every 3 months. So, for each stock every year hedge ratio is determined 4 times and for the total period of study it was determined 20 times for rebalancing of the portfolio. Likewise, hedge ratios were calculated for all the stocks in each sample set based on two methods OLS and GARCH with the help of Eviews software. Hedge ratio calculation: ? = ? (?S/ ?F) where ?S is the standard deviation of ?S, the change in the spot price during the hedging period, standard deviation of ?F, the change in the futures price during the hedging period, ? is the coefficient of correlation between ?S and ?F. Rebalancing is done every three months to adjust the number of contracts to be hedged and the trading profit is calculated. Number of contracts to be hedged: Vp x h* / Vi Vp -Value of the portfolio. h* -Hedge ratio. Vi -Value of one index future. The portfolio value without hedging and the hedged portfolio value is compared to prove the hedging effectiveness. For proving this statistical tests are done with the help of SPSS software. # ?F is the # T-Test -Mcap OLS hedged return and Mcap GARCH hedged return Ho : There is no significant difference between the Mcap OLS hedged portfolio returns and GARCH hedged portfolio returns. H1: There is a significant difference between the Mcap OLS hedged portfolio returns and GARCH hedged portfolio returns. # Findings and Discussion Indian equity investors can hedge their portfolio with nifty index futures as hedging reduces loss to a great extent based on this study. Even during the worst of times hedged portfolio value remains unscathed compared to the unhedged open portfolio. Use of complex heteroscedastic models are discouraged as simple OLS model is giving better results than complex heteroscedasticity GARCH models as observed. Even when there are differences in performance, they are very minimal which can be ignored. It can be noticed that when a portfolio is hedged it can withstand harsh bearish conditions like that of 2008 crash. Though we have ignored the transaction cost it can affect the portfolio performance if more churning is done or if the transaction costs are prohibitive. However in the current low cost (brokerage) scenario the impact of transaction cost will be minimal in the Indian context. Fund managers can use either fundamental factors or technical tools to decide when to hedge the portfolio. This study is useful for Investors in selecting the right kind of stocks for the portfolio. In this study it is proved that high Mcap stocks can be hedged effectively using index hedging. Investors can invest in high Mcap stocks as they provide the best appreciation even during uncertain periods and hedging is very effective. # IV. # Conclusion The research proves that the equity risk of a portfolio can be offset by hedging the portfolio with nifty index futures. The hedged value determined based on OLS (Ordinary least squares) method is high for Market Cap stock portfolios than GARCH (Generalized autoregressive conditional heteroscedasticity) model. So, the traditional simple OLS model is preferable to complex GARCH model in calculating hedge ratio/beta. During periods of financial crisis like 2008-2009 maximum loss covered by hedging the portfolio is up to 68%. The protection of a portfolio through hedging should not encourage investors to use it indiscriminately for unwarranted situations. Only Unhedged portfolio can fulfill the objective of the portfolio by giving good returns. Hedging should be used as an anchor in a sailing ship charting risky waters. Hence use of hedging should be restricted to special situations where there is an inherent risk of market crash and the portfolio should be unhedged under normal circumstances. This spring's another question; when to hedge or whether to hedge or not?. This situation is a tricky one as further research is needed to find out the suitability of stop loss or other models to initiate hedging. Both fundamental and technical analysis tools may be employed to arrive at the decision. # Mean 11Reliance2Infosys3HUL -Hindustan Unilever Ltd4HDFC5HDFC Bank6ONGC-Oil and Natural Gas Corporation7NTPC8Tata Consultancy Services9ITC10SBI -State Bank of IndiaSource: www.nse.comd) Financial Analysis 2Source: Authors compilation. 4Source: Authors research output using data from www.nse.com 5In similar way unhedged portfolio return iscalculated every month for 5 years2017YearDate Portfolio Value in Rs. Hedge ratio Nifty Value of nifties to be hedged in Rs. Profit/ Loss in Rs. Date Portfolio Value in Rs. Hedge ratio Nifty Value of nifties to be hedged in Profit/ Loss in Rs. Value of extra nifties hedged in Rs. tot hedge in Rs. Un hedged value in Rs. Trading profit in Rs. Hedged value in Rs. Rs.1-Jan-08 9998896.1 0.6802 6144.35 6801249 0 1-Jan-08 9998896.1 0.7015 6144.35 0 0 9998896.1 9998896.05 70142261-Feb-08 8778964.8 0.6802 5317.25 5885506 429521 1-Feb-08 8778964.8 0.7015 5317.25 429521 88637.4 6158444 8778964.8 944178.89 9723143.69 60698063-Mar-08 7977702.3 0.6802 4953 5562387 409065.1 3-Mar-08 7977702.3 0.7015 4953 421874.68 -140211 5596358 7977702.3 1366053.6 9343755.82 5736569Volume XVII Issue III Version I Global Journal of Management and Business Research ( ) CValue of extra nifties hedged in Rs.085946.06-135954tot hedge in Rs.59714525426433Unhedged value in Rs.9998896.18778964.87977702.3Trading profit in Rs.0915510.31324575Hedged value in Rs.9998896.0596944759302278Source: Authors research output using data from www.nse.com 6DateUnhedged portfolio valueOLS Hedged value in Rs.GARCH Hedged value in Rs.1-Jan-089998896999889699988961-Feb-088778965972314496944753-Mar-087977702934375693022781-Apr-087555383916261291138112-May-088424073948026394195442-Jun-087651525926463092159561-Jul-08643356390092148981359Year1-Aug-08729654891670819227024161-Sep-08 1-Oct-087178987 66203919138187 91224329187090 9103742Volume XVII Issue III Version I3-Nov-08 1-Dec-08 1-Jan-09 2-Feb-09 2-Mar-09 1-Apr-09 4-May-09 1-Jun-095387486 4918888 5374288 4993423 4824524 5377937 6449779 77172399218522 9308613 9201967 9170367 9124227 9163493 9534188 97625309101810 9150694 9085503 9027243 8971733 9050244 9398719 9594129( ) C1-Jul-09755023398119319650388Global Journal of Management and Business Research3-Aug-09 1-Sep-09 1-Oct-09 3-Nov-09 1-Dec-09 4-Jan-10 1-Feb-10 2-Mar-10 1-Apr-10 3-May-10 1-Jun-10 1-Jul-10 2-Aug-10 1-Sep-108241071 8105053 8979411 7907787 8633103 9051016 8590524 8642354 8948289 8866261 8520929 8926718 9392359 954328610034082 10007535 10298128 9932823 9913832 10188779 10134538 10041111 10014283 10002144 9918298 10030060 10358432 104782179895867 9863872 10183521 9787841 9800858 10081953 10060727 9955496 9901625 9887423 9795859 9916299 10193533 103017161-Oct-101056376710974948106033271/11/20101052464710964823105642071/12/201010258371108743421032922314-Jan-11994580010905671102022631-Feb-1198024551105518510642861Source: Authors research output using data from www.nse.co e) Statistical Analysis 7120000001000000080000006000000Unhedged portfolio valueOLS Hedged value in Rs.GARCH Hedged value in Rs.4000000200000001-Jan-081-Jan-091-Jan-101-Jan-111-Jan-12 8Year18Volume XVII Issue III Version I( )Global Journal of Management and Business ResearchDifferences Std. Deviation Mean MCAPOLS Mean 1.01E7 MCAPGARCH 9.847235E6tN 63 63df(2-tailed) Sig Std. Deviation 642885.676 5.0545330E52.8910411E52.2931995E510.00762.000Source: Authors research output using data from www.nse.comC 2017 © 2017 Global Journals Inc. (US) 1Figure 1: Comparison chart of unhedged portfolio value with OLS/GARCH hedged portfolio values. 8MeanDifferences Std. DeviationtdfSig (2-tailed)-1.64282E69.76155E5-13.35862.000Result: The table 8 & 9 shows that Market Cap unhedged portfolio value is Rs.84,93,523 while that ofMarket Cap hedged portfolio(OLS) value isRs.1,01,00,000. The null hypothesis H 0 is rejected andalternate hypothesis H 1 is accepted as sigma value is 0.Inference: The objective of hedging the portfolio andeffectiveness is achieved as the Market Cap hedgedportfolio (OLS) return is around the expected valuewhich is proved by the rejection of null hypothesis. Thereis 16% gain over the unhedged value which iscontributed by the hedge.III. 9NStd. Deviation © 2017 Global Journals Inc. (US) © 2017 Global Journals Inc. (US) 1 * Major Issues Related to Hedge Accounts JAdams CJMontesi Financial Accounting Standard Board -Business & Economics 1995 * Generalized Autoregressive Conditional Heteroskedasticity TBollerslev Journal of Econometrics 31 1 1986 * Autoregressive Conditional Heteroskedasticity with Estimates of the Variance of United Kingdom Inflation REngle Econometrica 50 9 1982 * An excellent choice of Nobel laureates TarunRamadorai 2013 * The Adjustment of stock prices to New Information EugeneFFama LawrenceFisher CMichael RichardJensen Roll International Economic Review 10 1 1969 * Hedging Performance and Basis Risk in Stock Index Futures SFiglewski The Journal of Finance 39 3 1984 * Market Index Futures Contract and Portfolio Selection DGrant Journal of Economics and Business 34 14 1982 * Derivatives and Risk Management Madhumathi. R & Ranganatham 2012 Pearson publication * A comparative study on beta hedging og high PE and Low PE stocks using Index futures with reference to NSE AMary Vishwanath Panneerselvam Indian Journal of Finance 7 8 2013 * Securities and Exchange Board of India RogerKoenker GilbertBassett L. C. Gupta Committee Report 46 1 1978. 1998 Econometrica * Financial Liberalisation, Stockmarkets and Economic development ASingh The Economic Journal 107 442 1997