| The empirical study analyzes derivative hedging strategies that can be
implemented for an investor who has been holding SASOL (Pty) Ltd.'s stocks before February
1999, in relation to that of Johannesburg Securities Exchange (JSE) Top 40 Index.
Moreover, as the relationship between SASOL's stock and the JSE Top 40 Index changes,
this empirical report recommends a different derivative hedging strategy based
on calculations and the relationship of the two variablesSASOL (Pty) Ltd. and the
JSE Top 40 Index. A correct execution of a derivative hedging strategy does not
mean that no losses will be incurred, but that ideally, the overall net position of the
derivative hedging strategy should be positive. Each investment portfolio needs a
tailor-made derivative strategy that fits it well. Furthermore, for hedging strategy to work
well, it needs proper monitoring by a skilled professional.
An investor who holds an equity stock for a long time is always interested in maximizing
his or her returns, from the point when the share is acquired til he or she decides to shorten
his or her position in the equity stock. Sometimes, the investor might be required to use
various derivative hedging strategies that will be beneficial to his or her investment portfolio,
provided that the hedging strategy is properly implemented and monitored. Some derivative
hedging strategies require the building of exotic derivative pricing models that change when the
value of a derivative is influenced by several variables, as indicated by Heath and Platen
(2001). According to Heath and Platen (2001, p. 1), "the paper presents a financial market model
that generates stochastic volatility using a minimal set of factors".
Various empirical studies by Benninga and Wiener (1998), Heath and Platen
(2001), Barria and Hall (2002), and Cobbs and Wolf (2004), confirmed that there is no
specific derivative hedging strategy that could be regarded as superior to the rest. Generally,
most derivative hedging strategies are tailor-made for specific industries and
organizations. Sometimes, companies within the same line of business might need different
derivative hedging strategies during the same period. However, it has been confirmed that
dynamic models offer more superior and reliable results when compared to simple models,
as indicated by Benninga and Wiener (1998). It should be kept in mind that the number
of variables used to build a specific derivative pricing model makes a big difference to the
results obtained from one model to the other.
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