Hedging With Futures Flashcards
1
Q
Why do people hedge?
A
Investors hedge to reduce or alter risk exposure.
Firms hedge to provide financial risk management to lessen exposure to certain risky projects and control for import/export prices (FX futures).
2
Q
What are the reasons not to hedge?
A
Hedging can give you a misleading impression of the mount of risk reduced. Hedging eliminates the opportunity to take advantage of favourable market conditions. There is no such thing as a hedge - most of the time you move the risk from yourself to someone else.
3
Q
Describe the relationship of short hedging and long hedging.
A
Pi = (St-So) - (fT-f0) ~ short in spot and long in future, transactions from futures market subtract from short market
** do the long hedge here
