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Ch03HullOFOD6thEd

# Ch03HullOFOD6thEd - Options Futures and Other Derivatives 6...

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Unformatted text preview: Options, Futures, and Other Derivatives 6 th Edition, Copyright © John C. Hull 2005 3.1 Hedging Strategies Using Futures Chapter 3 Options, Futures, and Other Derivatives 6th Edition, 3.2 Long & Short Hedges A long futures hedge is appropriate when you know you will purchase an asset in the future and 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 Options, Futures, and Other Derivatives 6th Edition, 3.3 Short Hedge May 15 th . A company sells 1m barrels of oil , price to be that of Aug 15 th . Spot price: \$19 per barrel August oil futures price \$18.75. Hedging Strategy is to be? Options, Futures, and Other Derivatives 6th Edition, 3.4 strategy May 15 th . Short 1,000 August futures contracts August 15 th . Close out. Result: The company will receive a price close to \$18.75 per barrel. Options, Futures, and Other Derivatives 6th Edition, 3.5 Outcome Suppose Aug 15 th . Spot = \$17.50. The company realises \$17.5m for the spot sale of its oil under the contract. Because August is the delivery month for the futures contract, the futures price will be very close to the spot price of \$17.50 on that date. The gain will be: \$18.75- \$17.50 = \$1.25. per barrel Options, Futures, and Other Derivatives 6th Edition, 3.6 or \$1.25 m in total. From the short futures position.The total amount realised from both the sales contract and the futures position is \$18.75 per barrel....
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Ch03HullOFOD6thEd - Options Futures and Other Derivatives 6...

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