Professional Documents
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Futures
Chapter 3
Fundamentals of Futures and Options Markets, 8th Ed, Ch3, Copyright John C. Hull 2013
Fundamentals of Futures and Options Markets, 8th Ed, Ch3, Copyright John C. Hull 2013
Fundamentals of Futures and Options Markets, 8th Ed, Ch3, Copyright John C. Hull 2013
Spot
Price
Futures
Price
Time
t1
t2
Fundamentals of Futures and Options Markets, 8th Ed, Ch3, Copyright John C. Hull 2013
Basis Risk
Basis is the difference between
spot & futures
Basis risk arises because of
the uncertainty about the basis
when the hedge is closed out
Fundamentals of Futures and Options Markets, 8th Ed, Ch3, Copyright John C. Hull 2013
S2
Gain on Futures
F2 F1
Fundamentals of Futures and Options Markets, 8th Ed, Ch3, Copyright John C. Hull 2013
Price of asset
S2
Gain on Futures
F1 F2
Fundamentals of Futures and Options Markets, 8th Ed, Ch3, Copyright John C. Hull 2013
Choice of Contract
Choose a delivery month that is as close
as possible to, but later than, the end of
the life of the hedge
When there is no futures contract on
the asset being hedged, choose the
contract whose futures price is most highly
correlated with the asset price. There are
then 2 components to basis
Fundamentals of Futures and Options Markets, 8th Ed, Ch3, Copyright John C. Hull 2013
where
S
F
10
QF
VA
VF
h *Q A
=
QF
h *V A
=
VF
Fundamentals of Futures and Options Markets, 8th Ed, Ch3, Copyright John C. Hull 2013
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Fundamentals of Futures and Options Markets, 8th Ed, Ch3, Copyright John C. Hull 2013
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Example continued
The size of one heating oil contract is 42,000 gallons
The spot price is 1.94 and the futures price is 1.99
(both dollars per gallon) so that
13
VF
where VA is the current value of the
portfolio, b is its beta, and VF is the
current value of one futures
(=futures price times contract size)
Fundamentals of Futures and Options Markets, 8th Ed, Ch3, Copyright John C. Hull 2013
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Example
Futures price of S&P 500 is 1,000
Size of portfolio is $5 million
Beta of portfolio is 1.5
One contract is on $250 times the index
What position in futures contracts on the
S&P 500 is necessary to hedge the
portfolio?
Fundamentals of Futures and Options Markets, 8th Ed, Ch3, Copyright John C. Hull 2013
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Changing Beta
What position is necessary to reduce the
beta of the portfolio to 0.75?
What position is necessary to increase the
beta of the portfolio to 2.0?
Fundamentals of Futures and Options Markets, 8th Ed, Ch3, Copyright John C. Hull 2013
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Fundamentals of Futures and Options Markets, 8th Ed, Ch3, Copyright John C. Hull 2013
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19
Stock Picking
If you think you can pick stocks that will
outperform the market, futures contract
can be used to hedge the market risk
If you are right, you will make money
whether the market goes up or down
Fundamentals of Futures and Options Markets, 8th Ed, Ch3, Copyright John C. Hull 2013
20
Fundamentals of Futures and Options Markets, 8th Ed, Ch3, Copyright John C. Hull 2013
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