Hedging strategies Using futures Chapter 4 Options, Futures, and other Drerivatives, 5th edition o 2002 by John C. Hull
Options, Futures, and Other Drerivatives, 5th edition © 2002 by John C. Hull 4.1 Hedging Strategies Using Futures Chapter 4
4.2 Long short hedges A long futures hedge is appropriate when 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 Options, Futures, and other Drerivatives, 5th edition o 2002 by John C. Hull
Options, Futures, and Other Drerivatives, 5th edition © 2002 by John C. Hull 4.2 Long & Short Hedges • A long futures hedge is appropriate when 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
4.3 Arguments in Favor of Hedging Companies should focus on the main business they are in and take steps to minimize risks arising from interest rates, exchange rates, and other market variables Options, Futures, and other Drerivatives, 5th edition o 2002 by John C. Hull
Options, Futures, and Other Drerivatives, 5th edition © 2002 by John C. Hull 4.3 Arguments in Favor of Hedging • Companies should focus on the main business they are in and take steps to minimize risks arising from interest rates, exchange rates, and other market variables
4.4 Arguments against Hedging Shareholders are usually well diversified and can make their own hedging decisions It may increase risk to hedge when competitors do not Explaining a situation where there is a loss on the hedge and a gain on the underlying can be difficult Options, Futures, and other Drerivatives, 5th edition o 2002 by John C. Hull
Options, Futures, and Other Drerivatives, 5th edition © 2002 by John C. Hull 4.4 Arguments against Hedging • Shareholders are usually well diversified and can make their own hedging decisions • It may increase risk to hedge when competitors do not • Explaining a situation where there is a loss on the hedge and a gain on the underlying can be difficult
4.5 Convergence of Futures to Spot Futures Price TSpot Price Spot Price Futures Price Time Time (b) Options Futures, and Other Drerivatives, 5th edition@ 2002 by John C. Hull
Options, Futures, and Other Drerivatives, 5th edition © 2002 by John C. Hull 4.5 Convergence of Futures to Spot Time Time (a) (b) Futures Price Futures Price Spot Price Spot Price