T eration of the types of instruments on various organized exchanges and by the increasing trading volume of each instrument since the first futures contracts on foreign currencies were introduced by the Chicago Mercantile Exchange in 1972 and the establishment of the Chicago Board Options Exchange in 1973. The usual economic rationale for futures and options is that they facilitate hedging. In other words, these instruments enable investors who hold the underlying assets to transfer the risk of price change to individuals who are more willing to bear such risk.
In the case of financial futures, their hedging effectiveness has been extensively studied by various researchers. Following the mean-variance portfolio approach, researchers usually examine the change in risk as futures are introduced into a portfolio containing the underlying assets. Examples are Ederington's (1979) study of futures written on two debt instruments (GNMA's and T-bills), Figlewski's (1984 and 1985) studies of futures written on stock indices, and Hill and Schneeweis ' (1981 and 1982) studies of futures written on currencies, among others. In the case of options, Chang and Shanker (1986) have examined the hedging effectiveness of currency options. Paralleling these and other empirical studies are the theoretical developments of hedging performance by Howard and D'Antonio (1984) and Bell and Krasker (1986), among others.