Hedging a share portfolio with futures contracts: A linear goal programming approach

ABSTRACTAn investor wishing to hedge his share portfolio with futures contracts wants to ensure that the losses he incurs with his share portfolio during adverse market conditions are adequately covered by the profits he makes with the futures contracts he sells while wishing to minimise the costs involved with his participation in the futures market. These costs consist of transaction costs, cash outflows for margin deposits, and the opportunity cost of the margins deposited at the broker.The traditional hedging methods do not take the above mentioned costs into consideration. A linear goal programming model for South African conditions is developed which optimises the conflicting needs of the investor by updating his position on a weekly basis.