FINA 4110 Slides 3 [Hedging Strategies Using Futures]

FINA 4110 Slides 3 [Hedging Strategies Using Futures] -...

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Hedging Strategies Using Futures Chapter 3 1
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Long & Short Hedges z A long futures hedge is appropriate when you know you will purchase an asset in the future and want to lock in the price z A short futures hedge is appropriate when you know you will sell an asset in the future & want to lock in the price 2
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Arguments in Favor of Hedging Companies should focus on the main business they are in and take steps to minimize risks arising from interest rates, exchange rates, and other market variables 3
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Arguments against Hedging z Shareholders are usually well diversified and can make their own hedging decisions z It may increase risk to hedge when competitors do not z Explaining a situation where there is a loss on the hedge and a gain on the underlying can be difficult 4
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Convergence of Futures to Spot (Hedge initiated at time t 1 and closed out at time t 2 ) Time Spot Price Futures Price t 1 t 2 5
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Basis Risk z Basis is the difference between spot & futures z Basis risk arises because of the uncertainty about the basis when the hedge is closed out 6
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This note was uploaded on 03/03/2012 for the course FINA 4110 taught by Professor Liu during the Spring '11 term at CUHK.

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FINA 4110 Slides 3 [Hedging Strategies Using Futures] -...

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