Hedging equations Flashcards
When might you use a short futures hedge ??
A short futures hedge is appropriate when you know you will sell an asset in the future and want to lock in the price. It is a hedge against the possibility of a fall in price.
When might you use a long futures hedge ??
A long futures hedge is appropriate when you know you will purchase an asset in the future and want to lock in the price. It is a hedge against the possibility of a rise in price.
Profit/loss if spot price is 325p at maturity
Profit/loss if spot price was 305p at maturity
How do u find the total amount paid out by the company ??
What is the equation for the optimal hedge ratio ??
-σS is the standard deviation of ΔS, the change in the spot price during the hedging period
-σF is the standard deviation of ΔF, the change in the futures price during the hedging period
-ρ is the coefficient of correlation between ΔS and ΔF
How do you find the optimal number of contracts, without tailing the hedge ?
QA
Size of position being hedged (units)
QF
Size of one futures contract (units)
VA
Value of position being hedged (=spot price times QA)
VF
Value of one futures contract (=futures price times QF)
How do you find the optimal number of contacts after tailing adjustment to allow for the impact of daily settlement figures (Tailing the hedge)
VA
Value of position being hedged (=spot price times QA)
VF
Value of one futures contract (=futures price times QF)
What is the hedge ratio ??
If the size of 1 heating oil contract is 42,000G
Spot price - 1.94
Futures price - 1.99
What is the optimal number of contracts with/without tailing the hedge
If the optimal hedge ratio is 1 than if we are hedging using index futures whats the equation for number of contacts needed ??
where VA is the value of the portfolio and VF is the value of one futures contract
Since it mirrors the S&P 500 h* = 1
What position is required to hedge her ??
What is the gain or loss on futures ??
What is their net position ??
How do you find the return of a hedge ??
What is the equation for the number of contracts needed if we have a beta
What strategy should you do if wanting to reduce portfolio beta
When reducing the portfolio beta your investment strategy is shorting contract
What strategy should you do if wanting to increase portfolio beta
When reducing the portfolio beta your investment strategy is to long contract
To hedge the portfolio with futures an adjustment to the hedge ratio is required.
what is the equation for the adjusted hedge ratio ??
What is the equation to remove all market risk ?
