HEDGED POSITION

Futures Dec Contract

Current Spot Price $ 5.60
Purchase Price (Future price Dec contracts) $ 5.90
Number of contracts 10
Units per contract 1000
Total Purchase price $ 59,000

Spot Price in November $ 8.00

Effective Purchase price/ Ounce $ 5.45
Total Effective price paid for 10,000 troy Ounces $ 54,500
D POSITION
s Dec Contract
Sale Price (Future price in november) $ 8.45
Number of contracts 10
Units per contract 1000
Total Sale price $ 84,500
Gain in Futures $ 25,500
Gain per ounce $ 2.55
 Unhedged Position
Purchase price (November Spot) $ 8
Total price paid for 10,000 troy Ounces $ 80,000

Gain in hedging/ troy ounce $ 2.55

Gain in hedging $ 25,500
 Stock Beta Investment Weights
A 1.2 400000 0.4
B 1.3 350000 0.35
C 0.9 250000 0.25
1000000
Weighted Beta 1.16

N=(Target beta - beta)* portfolio/Index futures

N -2.91 means 3 short futures contracts

 Index futures 1100
Lot size 50

futures contracts
 “If the optimal cross hedge ratio is calculated as 1.0, the hedge is considered to be perfect.” Expla

Hedge ratio will be 1 when correlat

No, The hedge will not be a perfect hedge. and Standard deviation of asset is tw
deviation of futures

Explain why a short hedger’s position improves when the basis strengthens unexpectedly and wors

A short futures hedge is appropriate w

Basis is the difference between spot & futures

SHORT HEDGE

INITIAL FUTURES PRICE F1

FINAL SPOT PRICE S2
FINAL FUTURES PRICE F2

Effective price realized S2+F1-F2 F1+BASIS IF BASIS IS HIGHER, PRICE REALIZED WILL BE HI
IF BASIS IS LOWER, PRICE REALIZED WILL BE LO
 considered to be perfect.” Explain your answer

Hedge ratio will be 1 when correlation will be 50%

nd Standard deviation of asset is twice the standard So, the hedge is clearly not perfect
deviation of futures

engthens unexpectedly and worsens when the basis weakens unexpectedly.

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

HER, PRICE REALIZED WILL BE HIGHER, SO BASIS STRENGTHENS, HEDGING IMPROVES IN SHORT HEDGE
WER, PRICE REALIZED WILL BE LOWER, SO BASIS WEAKENS, HEDGING WEAKENS FOR SHORT HEDGE
the price

HORT HEDGE