Professional Documents
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Hedging strategies
using futures
PowerPoint to accompany:
Basic principles
Hedgers:
Use futures market to reduce risk
Take short futures position or long futures position
Choose which futures contract should be used
Decide the optimal size of the futures position
Copyright 2014 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442532793/Hull Et Al/Fundamentals of Futures and Options Markets Australian/1e
Copyright 2014 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442532793/Hull Et Al/Fundamentals of Futures and Options Markets Australian/1e
Copyright 2014 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442532793/Hull Et Al/Fundamentals of Futures and Options Markets Australian/1e
Copyright 2014 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442532793/Hull Et Al/Fundamentals of Futures and Options Markets Australian/1e
Copyright 2014 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442532793/Hull Et Al/Fundamentals of Futures and Options Markets Australian/1e
Copyright 2014 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442532793/Hull Et Al/Fundamentals of Futures and Options Markets Australian/1e
Copyright 2014 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442532793/Hull Et Al/Fundamentals of Futures and Options Markets Australian/1e
Copyright 2014 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442532793/Hull Et Al/Fundamentals of Futures and Options Markets Australian/1e
Basis risk
Basis is the difference between spot and futures
Basis risk arises because of the uncertainty about the basis when
the hedge is closed out
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Copyright 2014 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442532793/Hull Et Al/Fundamentals of Futures and Options Markets Australian/1e
Basis risk
Variation of basis over time
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Copyright 2014 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442532793/Hull Et Al/Fundamentals of Futures and Options Markets Australian/1e
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Copyright 2014 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442532793/Hull Et Al/Fundamentals of Futures and Options Markets Australian/1e
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Copyright 2014 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442532793/Hull Et Al/Fundamentals of Futures and Options Markets Australian/1e
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
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Copyright 2014 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442532793/Hull Et Al/Fundamentals of Futures and Options Markets Australian/1e
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Copyright 2014 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442532793/Hull Et Al/Fundamentals of Futures and Options Markets Australian/1e
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Copyright 2014 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442532793/Hull Et Al/Fundamentals of Futures and Options Markets Australian/1e
Cross hedging
Assets are different (jet fuel vs. heating oil)
The hedge ratio is the ratio of the size of the position taken in
futures contracts to the size of the exposure
Cross hedging is setting the hedge ratio to minimise the variance of
the value of the hedged position
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Copyright 2014 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442532793/Hull Et Al/Fundamentals of Futures and Options Markets Australian/1e
where:
h*: the optimal hedge ratio
S: the standard deviation of S , change in the spot price during the hedging period
F: the standard deviation of F, change in the futures price during the hedging
period
: the coefficient of correlation between S and F
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Copyright 2014 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442532793/Hull Et Al/Fundamentals of Futures and Options Markets Australian/1e
where:
N*: the optimal number of futures contracts for hedging
h*: the optimal hedge ratio
QA: the size of position being hedged (units)
QF: the size of one futures contract (units)
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Copyright 2014 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442532793/Hull Et Al/Fundamentals of Futures and Options Markets Australian/1e
where:
N*: the optimal number of futures contracts for hedging
h*: the optimal hedge ratio
VA: the dollar value of the position being hedged
VF: the dollar value of one futures contract (the futures price times the size of
futures contract)
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Copyright 2014 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442532793/Hull Et Al/Fundamentals of Futures and Options Markets Australian/1e
where:
: the beta of the portfolio
VA: the current value of the portfolio
VF: the current value of one futures contract
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Copyright 2014 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442532793/Hull Et Al/Fundamentals of Futures and Options Markets Australian/1e
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Copyright 2014 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442532793/Hull Et Al/Fundamentals of Futures and Options Markets Australian/1e
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contracts is required
contracts is required
Copyright 2014 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442532793/Hull Et Al/Fundamentals of Futures and Options Markets Australian/1e
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Copyright 2014 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442532793/Hull Et Al/Fundamentals of Futures and Options Markets Australian/1e
Stock picking
If you think you can pick stocks that will outperform the market,
futures contracts can be used to hedge the market risk
If you are right, you will make money whether the market goes up
or down
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Copyright 2014 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442532793/Hull Et Al/Fundamentals of Futures and Options Markets Australian/1e