In this chapter, students will be able to understand: Basis risk, choice of a contract, optimal hedge ratio, reasons for hedging an equity portfolio, problems & exercises, rolling the hedge forward, business snapshots, exercises & problems. | 3. Hedging Strategies Using Futures Lecture #11 3. Basis Risk Basis is the difference between spot & futures Basis risk arises because of the uncertainty about the basis when the hedge is closed out 3. 3. 3. 3. Long Hedge Suppose that F1 : Initial Futures Price F2 : Final Futures Price S2 : Final Asset Price You hedge the future purchase of an asset by entering into a long futures contract Cost of Asset=S2 – (F2 – F1) = F1 + Basis Source: Options, Futures, and Other Derivatives 6th Edition, Copyright © John C. Hull 2005 3. | 3. Hedging Strategies Using Futures Lecture #11 3. Basis Risk Basis is the difference between spot & futures Basis risk arises because of the uncertainty about the basis when the hedge is closed out 3. 3. 3. 3. Long Hedge Suppose that F1 : Initial Futures Price F2 : Final Futures Price S2 : Final Asset Price You hedge the future purchase of an asset by entering into a long futures contract Cost of Asset=S2 – (F2 – F1) = F1 + Basis Source: Options, Futures, and Other Derivatives 6th Edition, Copyright © John C. Hull 2005 . | 3. Hedging Strategies Using Futures Lecture #11 3. Basis Risk Basis is the difference between spot & futures Basis risk arises because of the uncertainty about the basis when the hedge is closed out 3. 3. 3. 3. Long Hedge Suppose that F1 : Initial Futures Price F2 : Final Futures Price S2 : Final Asset Price You hedge the future purchase of an asset by entering into a long futures contract Cost of Asset=S2 – (F2 – F1) = F1 + Basis Source: Options, Futures, and Other Derivatives 6th Edition, Copyright © John C. Hull 2005 . | 3. Hedging Strategies Using Futures Lecture #11 3. Basis Risk Basis is the difference between spot & futures Basis risk arises because of the uncertainty about the basis when the hedge is closed out 3. 3. 3. 3. Long Hedge Suppose that F1 : Initial Futures Price F2 : Final Futures Price S2 : Final Asset Price You hedge the future purchase of an asset by entering into a long futures contract Cost of Asset=S2 – (F2 – F1) = F1 + Basis Source: Options, Futures, and Other Derivatives 6th Edition, Copyright © John C. Hull 2005 3. | 3. Hedging Strategies Using Futures Lecture #11 3. Basis Risk Basis is the difference between spot & futures Basis risk arises because of the uncertainty about the basis when the hedge is closed out 3. 3. 3. 3. Long Hedge Suppose that F1 : Initial Futures Price F2 : Final Futures Price S2 : Final Asset Price You hedge the future purchase of an asset by entering into a long futures contract Cost of Asset=S2 – (F2 – F1) = F1 + Basis Source: Options, Futures, and Other Derivatives 6th Edition, Copyright © John C. Hull 2005 3.
