Hedging Strategies Using Futures
Hedging Strategies Using Futures
Hedging Strategies Using Futures
ISSUES
ASSUME
4. What is the optimal size of the futures position for reducing risk ?
ASSUME
1 Hedge-and forget
Figure 3.1 Variation of basic over time The effective price( 有效價格 ) that is obtained for the asset with
hedge is S2 + F1 – F2 = F1 + b2
3.3 Basis Risk
Choice of Contract
One key factor affecting basis risk is the choice of the futures contract to be used
for hedging. This choice has two components:
1.The choice of the assets underlying the futures contracts
2.The choice of the delivery month
S
h*
F
h* : Hedge ratio that minimizes the variance of the hedger’s position.
: Coefficient of correlation between ΔS and ΔF
ΔS : Change in spot price, S, during a period of time equal to the life of the hedge.
ΔF : Change in future price, F, during a period of time equal to the life of the hedge.
σS : Standard deviation of ΔS
σF : Standard deviation of ΔF
3.4 Cross Hedging
Optimal Number of Contracts ( 最
適契約數量 )
h* NA
N* The futures contracts used should
QF have a face value of h* NA
P
N*
A
N*: Optimal number of futures contracts for hedging
P : Current value of the portfolio
A : Current value of one futures contract
β : From the capital asset pricing model to determined
the appropriate hedge ratio
3.5 Stock Index Future
Example
Value of index in
900 950 1 ,000 1,050 1,100
three months :
Time to maturity
Futures price of
1,010 1,010 1,010 1,010 1,010
index today : 1
( 0.04 0.01)
Futures price of index in
902 900952
e 1,003
12
1,053 1,103
three months :
The gain from the short futures position
Gain on futures position = 30* ( 1,010 – 902 ) *250 = $ 810,000
810,000 435,000 52,500 – 322,500 – 697,500
:
•The loss on the index = 10 %
Return on market : – 9.750% •The
– 4.750%
index pays a
0.250%of 0.25%per
dividend
5.250%3
10.250%
months
• The risk-free interest rate = 1 % per 3 months
Expected return
– 15.125% ••An investor in the
– 7.625%
Expected
index would earn
return–on0.125%
portfolio
= – 9.75 %
7.375% 14.875%
on portfolio :
==$15,000,000*(1
+ 1.5*( – 9.75– –0.15125) = $4,243,750
1 ) = – 15.125 %
Expected portfolio value
in three months 4,243,750 4,618,750 4,993,750 5,368,750 5,743,750
(including dividends) : =$ 4,243,750 + $810,000
A hedge using index futures removes the risk arising from market and leaves
the hedger exposed only to the performance of the portfolio relative to the
market.
The hedger is planning to hold a portfolio for a long period of time and requires
short-term protection.
3.5 Stock Index Future
P 5,000,000
( *) (1.5 0.75) 15( short )
A 250,000
To increase the beta of the portfolio to 2.0
P 5,000,000
( * ) (2 1.5) 10(long )
A 250,000
3.5 Stock Index Future