Abstract
Undertaking business always involves taking risk. The future development of a company and their business is more uncertain the higher the risk that the company is facing. Risk management is a important factor in operating business. With the development of future markets entrepreneurs and investors obtained another risk management tool that made it possible to reduce risk. Futures are derivatives that can be used either for speculating or risk management. Especially in the area of financial futures, a rapid growth could be observed during the last few decades. Almost every month a new type of contract appears to meet the needs of a continuously growing corporate and institutional market.
This paper considers future contracts as hedging application to reduce price risk. Futures are standardized contracts to buy or sell an asset in the future. There are various types of futures which differ in the type of the underlying asset.
Futures are traded at organized exchanges. We consider the trading of future, their requirements, and market participants and their motivation.
Different commercial users of future contracts hedge in different ways. A long hedge is used to reduce price risk of an anticipated purchase whereas a short hedge reduces the price risk of an asset that is already held. If there is no exact, the hedgers needs matching, contract available, the hedger should use a cross hedging strategy. With all these strategies the hedger takes, to the asset opposite, a position in the future market that is highly correlated with the change in price of the asset in the spot market. Losses in one market are offset by gains in the other market.
For a successful hedge it is essential to choose an appropriate contract and hedge ratio. Faults can result in losses. The example of hedging a stock portfolio shows the application of an index future and presents the behavior of the hedged portfolio in different scenarios of stock market development.
Inhaltsverzeichnis (Table of Contents)
- Abstract
- I. Introduction
- 1. Problem background
- 2. Course of examination
- II. Main Part
- 1. Futures
- 1.1 Definition
- 1.2 Types of futures
- 1.3 Trading futures
- 1.3.1 Exchange and clearing house
- 1.3.2 Margins and daily settlement
- 1.3.3 Basis and convergence
- 1.4 Market participants and their motivation
- 2. Hedging with futures
- 2.1 Definition
- 2.2 Types of hedges
- 2.2.1 Short hedge
- 2.2.2 Long hedge
- 2.2.3 Cross hedging
- 2.3 Hedge Ratio
- 3. Hedging of a portfolio – an example
- 3.1 The portfolio and the future
- 3.2 Determining the hedge ration
- 3.3 Impact of market development
- 1. Futures
- III. Conclusion
- List of literature
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This paper aims to explain the application of futures contracts as a hedging tool to reduce price risk. It delves into the characteristics of futures, the different types available, and the mechanics of trading them. The paper also explores various hedging strategies, including short hedges, long hedges, and cross hedging, providing insights into their applications and benefits.
- Futures contracts as a risk management tool
- Types of futures and their underlying assets
- Trading futures in organized exchanges
- Different hedging strategies for various market participants
- The application of futures in hedging a portfolio
Zusammenfassung der Kapitel (Chapter Summaries)
The paper begins with an introduction that sets the stage for understanding the importance of risk management in business. It then delves into the world of futures, providing a detailed explanation of their definition, various types, and trading mechanisms. The discussion includes a look at the role of exchanges and clearing houses, margin requirements, daily settlements, and the concept of basis and convergence.
Following this, the paper explores the concept of hedging with futures, outlining different types of hedges, their benefits, and the importance of determining an appropriate hedge ratio. It concludes with a practical example of hedging a stock portfolio using an index future, showcasing how the strategy performs under different market conditions.
Schlüsselwörter (Keywords)
The paper focuses on key concepts such as futures contracts, hedging, risk management, price risk, market participants, exchange and clearing house, margins, daily settlement, basis, convergence, short hedge, long hedge, cross hedging, hedge ratio, portfolio hedging, and index futures.
- Citar trabajo
- Marco Scheidler (Autor), 2003, Hedging a portfolio with futures, Múnich, GRIN Verlag, https://www.grin.com/document/41921
