Hedging Using Futures Contracts Notations S÷ spot price at ti S,: spot price at t, Fi: futures price at tr F2: futures price at t2 bj: basis risk at tr b,: basis risk at t, t: the first day of the hedge(open the position) the last day of the hedge close out the position) Charles cao 11
11 Charles Cao Hedging Using Futures Contracts ◼ Notations: S1 : spot price at t1 S2 : spot price at t2 F1 : futures price at t1 F2 : futures price at t2 b1 : basis risk at t1 b2 : basis risk at t2 t1 : the first day of the hedge (open the position) t2 : the last day of the hedge (close out the position)
Hedging Using Futures Contracts An example S1=$25 F1=$22 S2=$20 2=$19 b1=S1-F1=$0.3 b2=S2-F2=$0.1 Charles cao
12 Charles Cao Hedging Using Futures Contracts ◼ An example: S1 = $2.5 F1 = $2.2 S2 = $2.0 F2 = $1.9 b1 = S1 - F1 = $0.3 b2 = S2 - F2 = $0.1