Hedging Strategies Using Futures by Edu Pristine

Author of lecture Hedging Strategies Using Futures

Edu Pristine

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...HP is going to sell hens in 3 months. His cost per hen is $50 and he knows he has to sell it above $50 to make a profit. Currently the price for hens in the market is $51. He knows that many of his friends and locals are breeding hens at the same time. So there is going to be an oversupply of hens in the next 3 months and the price is likely to ...

...  profits would rise as he had locked his selling price and the raw material prices went down. For others the change in profits would be 0. What if the raw material prices went up for some reason and the union decided to raise ...

... didn’t know when his hens would be ready for sale? What if he doesn’t get a long contract that will close his position just one day before the closing of his short contract? What if there is no contract for the type of hens HP is selling? This is basis risk Basis = spot price ...

...  situations is your calendar basis risk likely to be greatest? (FRM 2008 Sample Paper). A) Stack and roll in the front month in oil futures. B. Stack and roll in the 12-month contract in natural ...

... The futures prices are quite volatile during the delivery month. 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 ...

... cases investors don’t typically have portfolios that trace the index. Hence the concept of ... comes into play. Beta is a measure of a stock's volatility in relation to the market. Then in order to change the beta of the portfolio to ... , we need to long or short the (N) number ...

... you have a portfolio of $500,000 which mirrors S&P500. ...

... Then N = 500,000/125,000 = 4 contracts ...

... S&P 500 index is 1,457, and each S&P futures contract is for delivery of US$ 250 times the index. ...

.. series of futures contracts to increase the life of a hedge. Each time we switch from 1 futures contract to ...

... exchange. It is the total number of long positions / the total number of short positions. It is one trading day older than the prices’ day 16 Time Trading Activity - Open Interest - Jan 1 A buys 1 option and B sells 1 option contract 1 - Jan 2 C buys 5 option and D sells 5 option contract 6 - Jan 3 A sells his 1 option and D buys 1 options cont ract 5 - Jan 4 E ...

... down. What should the hen producer do? Answer • HP goes short on hen futures contract with a price of $50 or lower. After 3 months if the market price of hens goes down to $45 he makes a loss of ($5) per hen. Just before the futures settlement date when the futures price is close to spot price of $45, he closes his position by going long on a futures contract at $45. Hence he makes ...

... companies? What about transaction costs and commissions? Companies carry out high volume transactions hence cost of hedge is lower Hedging and competitors: What if the price of hen food was reduced as the hen producers union pressed the suppliers to reduce their prices. HP ...

... of asset – futures price contract • Basis = 0 when spot price = futures price • b 1 = S 1- F 1and b 2 = S 2- F 2 • HP pay off when he sells his hens: S 2+ F 1- F 2or F 1+ b 2 • In a typical transaction, F 1is known ...

... Assume the hedge ratio is adjusted to take into effect the mistiming of cash flows but is not adjusted for the basis risk of the hedge. In which of the following ...

... movement occurs at the front end, as well, so the 12-month contract won’t move as much. In gold, the term structure ...

... because: • The futures prices are quite volatile during the delivery month 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 In such cases the proportion ...

... practical cases investors don’t typically have portfolios that trace the index. Hence the concept of β comes into play. Beta (β) is a measure of a stock's volatility in relation to the market. Then in order to change the beta (β) of the portfolio to (β*), we need to long or short the (N*) ...

... If you have a portfolio of $500,000 which mirrors S&P 500. Each S&P 500 ...

... 125,000. Then N* = 500,000/125,000 = 4 contracts ...

... the S&P 500 index is 1,457, and each S&P futures contract is for delivery of US$250 times the index. ...

... 1] * [300,100,000 / {250 * ...