4. Using Futures for Hedging
4.1 Short and Long Hedging
| Short Hedge | Long Hedge |
|---|---|
| Hedgers short a futures contract | Hedgers long a futures contract |
| Against a price decrease in existing long position | Against a price increase in existing short position |
| Realizes a positive return when the price of the hedged asset decreases | Realizes a positive return when the price of the hedged asset increases |
| Appropriate for long position | Appropriate for short position |
A short hedge is appropriate when the hedger already owns or will receive certain assets and expects to sell it at some time in the future.
A long hedge is appropriate when a company knows it will have to purchase certain assets in the future and wants to lock in a price now.
4.2 Pros and Cons of Hedging
Arguments for Hedging
Hedging can reduce the risk arising from changes in asset prices.
Hedging can help firms reduce the volatility of their earnings and potentially make themselves more attractive to investors.
Arguments against Hedging
Shareholder may prefer no hedging. Shareholders can do their own hedging and decide whether they wan to take on a particular risk.
The outcome with hedging will sometimes be worst than the outcome without hedging.
4.3 Basis Risk
4.3.1 Definition of basis risk
The basis is the difference between the spot price of an asset and its futures price.
Basis = Spot price—Futures price \text{Basis} = \text{Spot price} — \text{Futures price} Basis=Spot price—Futures price
Perfect hedging: If the asset to be hedged and the asset underlying the futures contract are the same, the basis should be zero at the expiration of the futures contract.
Basis risk is the uncertainty associated with the basis at the time a hedge is closed, thus the prefect hedging assumptions may be violated:
- The asset being hedgd and the underlying asset of futures contract is not the same.
- The futures price and the spot price are not equal at the time the hedge is closed out before maturity.
4.3.2 The impact of basis risk
Net cost of long position/Net receiving of short position
S
t
+
(
F
0
−
F
t
)
=
F
0
+
(
S
t
−
F
t
)
=
F
0
+
b
a
s
i
s
t
S_t+(F_0-F_t)=F_0+(S_t-F_t)=F_0+basis_t
St+(F0−Ft)=F0+(St−Ft)=F0+basist
Long the basis refers to a set of positions that consists of a short futures position and a long cash position.
Position that are long the basis benefit when the basis is strengthening.
Short the basis refers to a set of positions that consists of a long futures position and a short cash position.
Position that are short the basis benefit when the basis is weakening.
4.4 Hedge Ratio
4.4.1 Optimal hedge ratio
The hedge ratio is the ratio of the size of the position taken in futures contracts to the size of the exposure(underlying asset).
Suppose that historical data, used in conjunction with linear regression, shows that the best fit linear relationship between Δ S \Delta S ΔS and Δ F \Delta F ΔF is Δ S = a + b Δ F + ϵ \Delta S=a+b\Delta F +\epsilon ΔS=a+bΔF+ϵ
Suppose further that h h h is the hedge ratio, Δ S − h Δ F = a + ( b − h ) Δ F + ϵ \Delta S-h\Delta F=a+(b-h)\Delta F +\epsilon ΔS−hΔF=a+(b−h)ΔF+ϵ
The variance of the right-hand side is minimized by setting h = b h=b h=b(so that the second term is zero).
h
∗
=
ρ
∗
σ
S
σ
F
h^*=\rho*\frac{\sigma_S}{\sigma_F}
h∗=ρ∗σFσS
h
∗
=
ρ
∗
σ
S
σ
F
=
C
o
v
(
S
,
F
)
σ
F
2
=
ρ
∗
σ
F
σ
S
σ
F
2
=
β
h^*=\rho*\frac{\sigma_S}{\sigma_F} =\frac{Cov(S,F)}{\sigma_{F}^2}=\frac{\rho*\sigma_F\sigma_S}{\sigma_{F}^2}=\beta
h∗=ρ∗σFσS=σF2Cov(S,F)=σF2ρ∗σFσS=β
- σ S \sigma_S σS: standard deviation of change in spot price S S S.
- σ F \sigma_F σF: standard deviation of change in future price F F F.
- ρ \rho ρ: coefficient of correlation between spot price and futures price.
4.4.2 Hedge Effectiveness
The optimal hedge ratio, h ∗ h^* h∗, is the slope of the best fit line when Δ S \Delta S ΔS is regressed against Δ F \Delta F ΔF.
Hedge effectiveness can be defined as the proportion of the variance that is eliminated by hedging.
ρ
2
=
R
2
=
(
h
∗
)
2
σ
F
2
σ
S
2
\rho^2=R^2=(h^*)^2\frac{\sigma_F^2}{\sigma_S^2}
ρ2=R2=(h∗)2σS2σF2
4.4.3 Optimal Number of Futures Contracts
The futures contracts used have a face value of h × N A h \times N_A h×NA, the most appropriate number of futures contracts required is:
N ∗ × Q F × Δ F = Q A × Δ S → N ∗ = h ∗ Q A Q F N^* \times Q_F\times \Delta F=Q_A \times\Delta S\to N^*=\frac{h^*Q_A}{Q_F} N∗×QF×ΔF=QA×ΔS→N∗=QFh∗QA
- Q A Q_A QA: size of position being hedged (units)
- Q F Q_F QF: size of one futures contact (units)
- N ∗ N^* N∗: optimal number of futures contracts for hedging
4.4.4 Hedging with Stock Index Futures
Stock index futures can be used to hedge a well-diversified equity portfolio.
The standard deviation of the daily return for the hedged asset can be assumed to be β \beta β multiplied by the standard deviation of the return provided by the futures price.
The correlation between the daily returns on the asset and the futures is approximately 1.
The number of futures contracts is calculated as the following:
h ∗ = ρ S , F σ S σ F = 1 × β × σ F σ F = β h^*=\rho_{S,F}\frac{\sigma_S}{\sigma_F}=1\times \frac{\beta \times \sigma_F}{\sigma_F}=\beta h∗=ρS,FσFσS=1×σFβ×σF=β
N ∗ = β ∗ V A V F N^*=\beta*\frac{V_A}{V_F} N∗=β∗VFVA
- V A V_A VA is the current value of the portfolio.
- V F V_F VF is the current value of the futures contract (the futures price times the contract size).
4.4.5 Managing Beta
A hedge using index futures removes the systematic risk( β = 0 \beta=0 β=0) arising from market moves.
Number of contracts = ( β ∗ − β ) ∗ V A V F \text{Number of contracts}=(\beta^*-\beta)*\frac{V_A}{V_F} Number of contracts=(β∗−β)∗VFVA
- β ∗ \beta^* β∗ is the target beta
- V A V_A VA is the current value of the portfolio.
- V F V_F VF is the current value of the futures contract (the futures price times the contract size).
Negative result indicates that selling futures to decrease systematic risk.
Positive result indicates that buying futures to increase systematic risk.
4.5 Other Types of Hedging
4.5.1 Cross Hedging
Cross hedging occurs when the assets underlying the futures contract and the asset whose price is being hedgd are different.
An airline that is concerned about the futures price of jet fuel might choose to use heating oil futures contracts to hedge its exposure on jet fuel.
4.5.2 Tailing the hedging
When futures contracts are used for hedging, there is daily settlement and series of one-day hedges. Tailing the hedge can deal with this case when making hedging decision.
4.5.3 Stock and roll
Sometimes hedgers are faced with a lack of liquid(i.e., actively trader) futures contracts for the required hedge maturities. Because the most liquid futures contracts are those with relatively short maturities, a hedger can work around this issue by following what is termed a stack and roll strategy.
- Implementing a short maturity futures hedge
- Closing the hedge out just prior to the delivery period and replacing it with another short-maturity futures hedge
- Closing the new hedge out just prior to the delivery period and replacing it with yet another short-maturity futures hedge, and so on.
扫一扫
4317
被折叠的 条评论
为什么被折叠?
到【灌水乐园】发言
