Chapter+4+Slides+New+Hedging+Strategies+Using+Futures

Chapter+4+Slides+New+Hedging+Strategies+Using+Futures -...

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FIN 480 (Instructor- Saif Rahman) Derivative Securities Chapter 4 Hedging Strategies Using Futures
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FIN 480 (Instructor- Saif Rahman) 1 Summary 1. Long and short hedges 2. Basis risk 3. Minimum variance hedging 4. Beta hedging using Index futures 5. Rolling the hedge forward
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FIN 480 (Instructor- Saif Rahman) 2 A long futures hedge is appropriate when you know you will purchase an asset in the future & want to lock in the price A short futures hedge is appropriate when you know you will sell an asset in the future & want to lock in the price
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FIN 480 (Instructor- Saif Rahman) 3 1.Long hedge when the investor is short on the underlying Long hedge: t=0 T Short S 0 (=100) long F 0 (=102) buy payoff=- S T +S 0 exercise payoff=-F 0 +S T Payoff: - S T +S 0 -F 0 +S T= = S 0 -F 0 (=-2: known at t=0)
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FIN 480 (Instructor- Saif Rahman) 4 2. Long hedge with futures when the investor has no position on the underlying Long hedge: expected cash outflows at maturity t=0 T No position: long F 0 (=102) exercise payoff=-F 0 Payoff: -F 0 (=-102: known at t=0) 0
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FIN 480 (Instructor- Saif Rahman) 5 3. Short hedge when the investor is long on the underlying Short hedge: t=0 T Long S 0 (=100) Short F 0 (=102) sell payoff=S T -S 0 exercise payoff=F 0 -S T Payoff: S T -S 0 +F 0 -S T =-S 0 +F 0 (=2; known at t=0)
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FIN 480 (Instructor- Saif Rahman) 6 4. Short hedge with futures when the investor has no position on the underlying Short hedge: expected cash inflows at maturity t=0 T Short F 0 (=102) exercise F 0 Payoff: F 0 (=102; known at t=0) 0 No position:
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This note was uploaded on 03/23/2011 for the course BUSINESS bus 173 taught by Professor Rtm during the Spring '11 term at IUP.

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Chapter+4+Slides+New+Hedging+Strategies+Using+Futures -...

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