Estimation of foreign exchange futures contracts' optimal hedge ratio

Aim of this study is to estimate the optimum hedge ratio of USD/TL future contracts at BIST Derivatives Market and determine the model performing model for estimation. Sample period of data is between 06.08.2013-30.03.2018. Spot USD/TL exchange rates announced by TRCB function as dependant variable and settlement prices of USD/TL futures contracts on BIST Derivatives Market function as independant variable. At this study, least squares method and symmetric and assymmetric GARCH models with normal and GED distributions are used. Results of application of models indicates that for 100 days out of sample period GED-GARCH(1,1) model forecasting variable variance of error terms is best performing model for estimating optimal hedge ratio. For 253 days out of sample period, there is not an outstanding model although both OLS and GED-GARCH(1,1) performs well. Keywords: Hedge ratio, financial risk, derivatives, USD/TL