Hedging Strategies Using Futures
Chapter 3
Options, Futures, and Other Derivatives, 7th Edition, Copyright John C. Hu !""#
$ong % Short Hedges
&
ong 'utures hedge is appropriate (hen you )no( you (i pur*hase an asset in the 'uture and (ant to o*) in the pri*e & short 'utures hedge is appropriate (hen you )no( you (i se an asset in the 'uture and (ant to o*) in the pri*e
Options, Futures, and Other Derivatives, 7th Edition, Copyright John C. Hu !""#
&rgu+ents in Favor o' Hedging
Co+panies shou d 'o*us on the +ain ,usiness they are in and ta)e steps to +ini+i-e ris)s arising 'ro+ interest rates, e.*hange rates, and other +ar)et varia, es
Options, Futures, and Other Derivatives, 7th Edition, Copyright John C. Hu !""#
&rgu+ents against Hedging
Shareho ders
are usua y (e diversi'ied and *an +a)e their o(n hedging de*isions 0t +ay in*rease ris) to hedge (hen *o+petitors do not E.p aining a situation (here there is a oss on the hedge and a gain on the under ying *an ,e di''i*u t
Options, Futures, and Other Derivatives, 7th Edition, Copyright John C. Hu !""#
Convergen*e o' Futures to Spot
2Hedge initiated at ti+e t1 and * osed out at ti+e t!3
Futures 5ri*e
Spot 5ri*e
4i+e t1 t!
Options, Futures, and Other Derivatives, 7th Edition, Copyright John C. Hu !""# 1
7asis 8is)
7asis
is the di''eren*e ,et(een the spot and 'utures pri*e 7asis ris) arises ,e*ause o' the un*ertainty a,out the ,asis (hen the hedge is * osed out
Options, Futures, and Other Derivatives, 7th Edition, Copyright John C. Hu !""#
$ong Hedge
9e
de'ine F1 : 0nitia Futures 5ri*e F! : Fina Futures 5ri*e S! : Fina &sset 5ri*e 0' you hedge the 'uture pur*hase o' an asset ,y entering into a ong 'utures *ontra*t then Cost o' &sset;S2 (F2 F1) = F1 < 7asis
Options, Futures, and Other Derivatives, 7th Edition, Copyright John C. Hu !""#
Short Hedge
&gain
(e de'ine F1 : 0nitia Futures 5ri*e F! : Fina Futures 5ri*e S! : Fina &sset 5ri*e
0'
you hedge the 'uture sa e o' an asset ,y entering into a short 'utures *ontra*t then 5ri*e 8ea i-ed;S2+ (F1 F2) = F1 < 7asis
Options, Futures, and Other Derivatives, 7th Edition, Copyright John C. Hu !""#
Choi*e o' Contra*t
Choose
a de ivery +onth that is as * ose as possi, e to, ,ut ater than, the end o' the i'e o' the hedge 9hen there is no 'utures *ontra*t on the asset ,eing hedged, *hoose the *ontra*t (hose 'utures pri*e is +ost high y *orre ated (ith the asset pri*e. 4his is )no(n as *ross hedging.
Options, Futures, and Other Derivatives, 7th Edition, Copyright John C. Hu !""#
Opti+a Hedge 8atio 2page 113
5roportion o' the e.posure that shou d opti+a y ,e hedged is h= S F (here S is the standard deviation o' S, the *hange in the spot pri*e during the hedging period, F is the standard deviation o' F, the *hange in the 'utures pri*e during the hedging period is the *oe''i*ient o' *orre ation ,et(een S and F.
Options, Futures, and Other Derivatives, 7th Edition, Copyright John C. Hu !""# 1"
Opti+a no o' *ontra*ts
>a;
Si-e o' port'o io to ,e hedged >'; Si-e o' one 'uture *ontra*t ?; opti+a no o' 'uture *ontra*ts 'or hedging ?; h @ >aA>'
Options, Futures, and Other Derivatives, 7th Edition, Copyright John C. Hu !""#
11
4ai ing the Hedge
4(o
(ay o' deter+ining the nu+,er o' *ontra*ts to use 'or hedging are
Co+pare the e.posure to ,e hedged (ith the va ue o' the assets under ying one 'utures *ontra*t Co+pare the e.posure to ,e hedged (ith the va ue o' one 'utures *ontra*t 2;'utures pri*e ti+e si-e o' 'utures *ontra*t
4he
se*ond approa*h in*orporates an adBust+ent 'or the dai y sett e+ent o' 'utures
Options, Futures, and Other Derivatives, 7th Edition, Copyright John C. Hu !""# 1!
Hedging Using 0nde. Futures
25age 613
4o hedge the ris) in a port'o io the nu+,er o' *ontra*ts that shou d ,e shorted is P F (here P is the va ue o' the port'o io, is its ,eta, and F is the va ue o' one 'utures *ontra*t
Options, Futures, and Other Derivatives, 7th Edition, Copyright John C. Hu !""#
13
E.a+p e
S%5 1"" 'utures pri*e is 1,"1" Ca ue o' 5ort'o io is D1,"1",""" 7eta o' port'o io is 1.1 8is) 'ree rate o' interest ;/E per annu+ Dividend yie d on inde.;1E per annu+ One 'uture *ontra*t is !1" ti+es o' inde. 9hat position in 'utures *ontra*ts on the S%5 1"" is ne*essary to hedge the port'o ioF
Options, Futures, and Other Derivatives, 7th Edition, Copyright John C. Hu !""#
1/
F;
!1" @ 1"1"; !1!1"" ?u+,er o' 'uture *ontra*ts that shou d ,e shorted to hedge the port'o io; 1.1@ 1"1","""A!1!1"";3"
Options, Futures, and Other Derivatives, 7th Edition, Copyright John C. Hu !""#
11
0'
inde. is ="" a'ter 3 +onths and 'uture pri*e is ="! 4he gain 'ro+ short 'utures position is ;3" 2 1"1"G="!3@ !1"; D #1",""" $oss 'ro+ port'o io; 1"1""""@ 21G ".111!13; D /!#61#7 4ota va ue; /!#61#7< #1""""; 1"=61#7
Options, Futures, and Other Derivatives, 7th Edition, Copyright John C. Hu !""# 16
company has a $20 million portfolio with a beta of 1.2. It would like to use futures contracts on the S& !00 to hed"e its risk. #he inde$ futures is currently standin" at 10%0& and each contract is for deli'ery of $2!0 times the inde$. (hat is the hed"e that minimi)es risk* (hat should the company do if it wants to reduce the beta of the portfolio to 0.+*
Options, Futures, and Other Derivatives, 7th Edition, Copyright John C. Hu !""# 17
4he
'or+u a 'or the nu+,er o' *ontra*ts that shou d ,e shorted gives 1.!@!",""","""A1"#"@!1";##.=
8ounding
to the nearest (ho e nu+,er, #= *ontra*ts shou d ,e shorted. 4o redu*e the ,eta to ".6, ha ' o' this position, or a short position in // *ontra*ts, is reHuired
Options, Futures, and Other Derivatives, 7th Edition, Copyright John C. Hu !""# 1#
Changing 7eta
9hat
position is ne*essary to redu*e the ,eta o' the port'o io to ".71F 9hat position is ne*essary to in*rease the ,eta o' the port'o io to !."F
Options, Futures, and Other Derivatives, 7th Edition, Copyright John C. Hu !""#
1=
Hedging 5ri*e o' an 0ndividua Sto*)
Si+i ar
to hedging a port'o io Does not (or) as (e ,e*ause on y the syste+ati* ris) is hedged 4he unsyste+ati* ris) that is uniHue to the sto*) is not hedged
Options, Futures, and Other Derivatives, 7th Edition, Copyright John C. Hu !""#
!"
9hy Hedge EHuity 8eturns
Iay
(ant to ,e out o' the +ar)et 'or a (hi e. Hedging avoids the *osts o' se ing and repur*hasing the port'o io Suppose sto*)s in your port'o io have an average ,eta o' 1.", ,ut you 'ee they have ,een *hosen (e and (i outper'or+ the +ar)et in ,oth good and ,ad ti+es. Hedging ensures that the return you earn is the ris)G'ree return p us the e.*ess return o' your port'o io over the +ar)et.
Options, Futures, and Other Derivatives, 7th Edition, Copyright John C. Hu !""#
!1
8o ing 4he Hedge For(ard
2page 6/G613
9e
*an use a series o' 'utures *ontra*ts to in*rease the i'e o' a hedge Ea*h ti+e (e s(it*h 'ro+ one 'utures *ontra*t to another (e in*ur a type o' ,asis ris)
Options, Futures, and Other Derivatives, 7th Edition, Copyright John C. Hu !""#
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