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Future Strategies Session 5: BY: Prof. Kapil Bhopatkar
Future Strategies Session 5: BY: Prof. Kapil Bhopatkar
Kapil bhopatkar
market .
Implication????
Speculator
They make estimates about the future prices
of stocks, indices and undertake buy or sell
transactions .
While doing so he accepts the risk passed on
by the hedger.
They provide depth and liquidity to the
risk.
It involves transaction costs, brokerage costs,
Impact costs.
They have limited capital and credit lines.
Every additional costs kills their motives and
and momentum.
Day Traders
They enter into futures position and liquidate
their positions by the end of the day.
They base their trades on proprietary model.
More far sighted then scalpers ensuring they
we don’t gain
Buy Cash Sell Futures or
Buy Futures Sell Cash
The basic hedging strategy is to take equal
and opposite position in the futures market
to the spot market.
Concept Hedge Ratio:-
Why do we need a hedge ratio?
It allows the hedger to decide the number of
future contracts that must be employed to
minimize the risk of combined cash futures
position.
Formula
Rs 25 lakhs.
You are concerned that the share market will
S&PCNX NIFTY INDEX- 2050 points SELL 6 S&PCNX NIFTY @2080 POINTS
Value of the portfolio= 2500000/- 6X2080X200
1ST September 1st September
of
A) The time span covered
B)Amount of the asset
C)Particular characteristics of Goods
Deciding the hedge ratio:
Hedge Ratio=Futures position/Cash Market
position
Correlation between Beta and hedge
ratio
Beta of the stock
The index is against which it is measured.
Hedging Process
Nifty is quoting at 2189.05 . Lots size 200
contracts . Weighted average size of the beta
= .98. Market Value of the portfolio 1767.59
X100000
Portfolio of MR.X
Portfolio Beta Each Nifty Extent of Number of
Value Contract hedging Contracts
EXPLAIN KARR…
Sell stock futures against a fall in
current holdings
If the stock is fundamentally strong and has
long term prospects it is not advisable to sell
it due to short term volatility.
In such cases it is advisable to sell the stock
Eg
Cash and Futures
Two different Futures Markets
Two different Cash Markets
Risk free returns which are better then
savings deposit rates and other risk free
liquid assets.
stocks?
What about Margins and Commissions.?
manner.
Wrong stocks are chosen.
Benefits
Multiple trades in just one order, allowing investors and
traders to be more efficient in managing their securities.
Provide investors with the ability to tailor their investment
1.2
Impediments in suggestions
Lengthy process
Transaction Costs.
All higher Beta stocks may not possess the
10000000*1.2
Calculate N
N= 9
Thus the fund manager will have to buy 9