lecture note of Derivatives

© All Rights Reserved

1 visualizações

lecture note of Derivatives

© All Rights Reserved

- PROJECT on Commodity Market From Nirmal Bang by PLABAN KUNDU
- 43 Forex Hedging
- c Me Commodity Trading Manual
- Price Action Trading
- Aileron Market Balance: Issue 14
- Traders World61
- 1st Time Quizz
- Chapter 10 - Forward and Futures Contracts Examples
- CFA Futures
- Crude Oil Revenge Trade cost me 50 ticks, don’t make this mistake tomorrow
- Mod2 Week 2 Chartbook
- Lecture 2 - Forwards and Futures Ppt
- Lecture 1 derivatives
- Leases
- World Oil_Market or Mayhem
- Chapter 13
- ZERODHA
- EFB344 Lecture06, Forwards and Futures 2(1)
- TN7 Hedge Ratios and Futures Contracts
- Commodity Daily Prediction Report by TradeIndia Research 09-10-2017

Você está na página 1de 38

& Hedging Strategies Using Futures

EF4420. Derivative Analysis and Advanced Investment Strategies

20 January, 2017

1 / 38

Lecture Outline

Specification of Futures Contract

Payoff of Forward and Futures

Delivery of Futures

Perfect and Imperfect Hedge

Cross Hedge

2 / 38

Specification of Futures Contract

and sellers of futures contracts.

Thus, the exchange should specify in detail the exact nature of the

contracts. These include..

1 Underlying asset

For commodities, there can be a variation in quality of the asset (e.g,

grade A orange juice).

For financial assets, usually no variation in the grade of the asset.

2 Contract size

Amount of asset that will be delivered under one contract (e.g. One

future contract on British pound is to buy/sell 62,500).

3 / 38

Specification of Futures Contract

3 Delivery arrangement

Place where delivery will be made (e.g. warehouse in Florida)

4 Delivery month

Futures contract is referred to by its delivery month (e.g., corn futures

on CME has delivery months of March, May, July, September, and

December).

The exchange must specify the exact period during the month when

the delivery can be made.

4 / 38

Payoff of Forward and Futures

Forward and futures are very similar to each other, but a forward

contract is simpler to analyze.

Let F denote the forward price (the promised price to buy/sell at the

maturity T of the contract).

(

long position: ST F

short position: F ST

flow takes place only on the date.

5 / 38

Payoff of Forward and Futures

Suppose we enter a futures contract on day 0 and the contract will

expire on date T .

Ex. Suppose we long futures on gold at the futures price of $1,250 per

ounce on day 0.

If later futures prices are as follows, then ...

Day Futures price Daily gain

0 1,250

1 1,241 (1,241-1,250) = -9

2 1,238 (1,238-1,241) = -3

3 1,244 (1,244-1,238) = 6

.. .. ..

. . .

T FT (FT FT 1 )

6 / 38

Payoff of Forward and Futures - Daily Settlement of

Futures

On the next day, suppose that new futures price becomes F1 . Then,

we settle the old contract and receive F1 F0 . Right after the

settlement, we start with new futures contract with F1 .

Assume that the risk-free rate is 0. Then, the cumulative gain from 0

to contract end T is

=FT F0

7 / 38

Operation of Margin Accounts

The exchange requires investors to set up a margin account when

they enter a position in futures.

Initial margin: the amount that must be deposited at the time the

contract is entered (e.g. $3,000 per contract)

Once the margin account is set up, the gain/loss from daily

settlement of futures will be added/subtracted to the account.

the balance in the margin account at a certain level.

Maintenance margin: the minimum amount that must be

maintained during the contract.

If the balance in the account falls below the maintenance margin,

investors receive a margin call from exchange. Then, they need to top

up the margin account up to the initial margin.

8 / 38

Operation of Margin Accounts - Example

$1,250 per ounce. The contract size is 100 ounce per contract.

contract.

balance

0 1,250 3,000

1 1,241 (1,241-1,250)100 = -900 2,100

2 1,238 (1,238-1,241)100 = -300 1,800 1,200

3 1,244 (1,244-1,238)100 = 600 3,600

4 1,242 (1,242-1,244)100 = -200 3,400

.. .. ..

. . .

9 / 38

Futures Price and Spot Price

Consider futures contracts for delivery on date T . Let Ft denote the

futures price on the contract starting on date t.

Then, (

For t < T , Ft 6= St (usually)

For t = T , Ft = St

10 / 38

Delivery of Futures

There are two types of delivery of futures:

1 Physical delivery: physically deliver underlying assets (e.g. commodity)

2 Cash settlements: final payoff of futures is paid in cash (e.g. stock

index)

warehouse costs

transportation costs

to feed and look after livestock

delivery.

To close the position, investors can enter the opposite position of the

original one.

Ex. Suppose we took a long position of futures on gold for September delivery at

futures price of $1,250 on Jan 1. To close the position on May 30, we short

the futures for September delivery at futures price of $1,320. 11 / 38

Market Quotes

Example of futures price quotes

Prices

Open: the price at which contracts were trading at the beginning of

the trading day

High: the highest price during the day

Low: the lowest price during the day

Settlement: the price used for calculating daily gain/loss (usually

closing price of the day)

(Trading) Volume: the number of contracts traded in a day

Open interest: the number of contracts outstanding

12 / 38

Market Quotes

Q. One day, one trader who already holds 10 futures contracts sells those

10 futures contracts to a new trader entering the market.

13 / 38

Hedging Using Futures

14 / 38

Hedging Using Futures

face (e.g, fluctuations in oil price, foreign exchange rate).

risk as far as possible.

reduce the risk when a hedger expects to sell an asset in the future

reduce the risk when a hedger expect to buy an asset in the future

15 / 38

Short Hedge - Example

barrels of crude oil. The price in the sales contract is the spot price

on August 15.

Oil futures price for August delivery is $79 per barrel, and each

contract is for delivery of 1,000 barrels.

Q. To hedge the risk, what position on futures should the producer take?

short 1,000 futures contract.

16 / 38

Short Hedge - Example

What if the the spot price of oil on August 15 turns out to be ...

1 $75 per barrel

{z1M} + |(79 75) 1M = 79M

{z }

sales contract futures contract

{z1M} + |(79 85) 1M = 79M

{z }

sales contract futures contract

17 / 38

Long Hedge - Example

of copper on May 15 to meet a certain contract.

Copper futures price for May delivery is $3.20 per pound, and each

contract is for delivery of 25,000 pounds.

Q. To hedge the risk, what position on futures should the fabricator take?

long 4 futures contract.

18 / 38

Long Hedge - Example

What if the the spot price of copper on May 15 turns out to be ...

1 $3.25 per pound

Total payment = 3.25 100, 000 (3.25 3.20) 100, 000 = 320, 000

| {z } | {z }

sales contract futures contract

Total payment = 3.05 100, 000 (3.05 3.20) 100, 000 = 320, 000

| {z } | {z }

sales contract futures contract

19 / 38

Perfect Hedge

completely, thus leaving no risk.

of the following conditions are satisfied:

1 The asset whose price is to be hedged is the same as the asset

underlying futures contract.

buy/sell the underlying asset.

20 / 38

Perfect Hedge

asset on date T.

To hedge the risk, the company short futures contract for delivery on

date T at futures price F0 .

ST + (F0 FT ) = ST + (F0 ST ) = F0

21 / 38

Imperfect Hedge

Futures contracts may not be available for a certain delivery month or

a certain underlying asset.

Then we try to use futures with the closest delivery month and on the

most similar underlying asset. However, this does not eliminate risk

completely.

1 Mismatch in delivery date

Suppose that on date 0, a company knows it will sell an underlying

asset on date 1.

The closest delivery date is T .

S1 + (F0 F1 ) = F0 + (S1 F1 )

| {z }

6=0

22 / 38

Imperfect Hedge

Suppose that on date 0, a company knows it will sell an underlying

asset A on date T .

the most similar asset for which future contract is available.

Let S denote the spot price of A and S denote the spot price of B.

ST + (F0 FT ) = F0 + (ST ST )

| {z }

6=0

23 / 38

Imperfect Hedge - General Case

Suppose that on date 0, a company knows it will sell an underlying

asset A on date 1.

Also, suppose that we try to hedge using futures on asset B for date

T delivery.

S1 + (F0 F1 ) = F0 + (S1 F1 )

| {z }

basis

2 In imperfect hedge, basis is uncertain and usually nonzero.

S1 F1 = (S1 S1 ) + (S F1 )

| {z } | 1 {z }

mismatch in asset mismatch in delivery

24 / 38

Cross Hedging

contract on a different underlying asset.

Ex. An airline that is concerned about the future price of jet fuel uses

futures contract on heating oil.

size of exposure

of the value of the hedged position.

25 / 38

Cross Hedging - Minimum Variance Hedge Ratio

units of underlying asset.

Let S denote the price change in the asset and F denote the

change in futures price in the hedge period.

S hF

26 / 38

Cross Hedging - Minimum Variance Hedge Ratio

and set it equal to 0:

Cov (S, F )

h =

Var (F )

S

h =

F

where is the correlation coefficient between S and F , F is the standard deviation of

F , and S is the standard deviation of S .

27 / 38

Cross Hedging - Minimum Variance Hedge Ratio

Given the optimal hedge ratio, we want to know the optimal number

of futures contract.

underlying assets of one futures contract.

N QF

h =

QA

Thus,

h QA

N =

QF

28 / 38

Cross Hedging - Example

month and decides to use heating oil futures for hedging. The

standard deviation of futures price is F = 0.0313, the standard

deviation of jut fuel price is S = 0.0263, and the correlation

coefficient is = 0.928.

Q2. Each of the futures contract is for 42,000 gallons of heating oil. How

many contracts does the airline need?

29 / 38

Stock Index Futures

of stocks (e.g. Dow Jones Industrial Averages, S&P 500)

portfolio). Futures on this specific portfolio is not available.

we use futures on a stock index.

30 / 38

Stock Index Futures

Suppose we invest $1 in the portfolio and short futures on$ h amount

of index.

Let rS denote the return on the portfolio and rF denote the the return

on futures over the hedging period.

rS hrF

h = =

Var (rF ) Var (rM )

31 / 38

Stock Index Futures

of one futures contract.

N VF

=

VA

Thus,

VA

N =

VF

32 / 38

Stock Index Futures - Example

Suppose we want to hedge the value of a stock portfolio over the next

three months. We use a futures contract with four months to

maturity. The situation is ...

S&P 500 index = 1,000

S&P 500 futures price = 1,010

Value of portfolio = $5,050,000

Risk-free interest rate = 4% per annum

Beta of portfolio = 1.5

One futures contract is for delivery $250 times the index.

5, 050, 000

N = (1.5) = 30

250 1, 010

33 / 38

Stock Index Futures - Example

What if S&P 500 index and futures prices are as follows three months

later?

in three months

Futures price 902 1,103

in three months

Gain on futures position

Expected return on portfolio

Expected portfolio value

Total value of position

in three months

34 / 38

Stock Index Futures - Example

Gain on futures = (1, 010 902) 250 30 = 810, 000

35 / 38

Stock Index Futures - Example

Gain on futures = (1, 010 1, 103) 250 30 = 697, 500

36 / 38

Stock Index Futures - Example

What if S&P 500 index and futures prices are as follows three months

later?

in three months

Futures price 902 1,103

in three months

Gain on futures position 810,000 -697,500

Expected return on portfolio -15.5% 14.5%

Expected portfolio value 4,267,250 5,782,250

Total value of position 5,077,250 5,084,750

in three months

value of the index.

37 / 38

Things To Do

38 / 38

- PROJECT on Commodity Market From Nirmal Bang by PLABAN KUNDUEnviado porPlaban Kundu
- 43 Forex HedgingEnviado porMadhuraShinde
- c Me Commodity Trading ManualEnviado pordanish_1985
- Price Action TradingEnviado porIki Key
- Aileron Market Balance: Issue 14Enviado porDan Shy
- Traders World61Enviado porpalharjeet
- 1st Time QuizzEnviado porViviane Filgueiras Evangelista
- Chapter 10 - Forward and Futures Contracts ExamplesEnviado porLeon Mushi
- CFA FuturesEnviado porAditya Bajoria
- Crude Oil Revenge Trade cost me 50 ticks, don’t make this mistake tomorrowEnviado porJoseph James
- Mod2 Week 2 ChartbookEnviado porsritrader
- Lecture 2 - Forwards and Futures PptEnviado porGifzy Sitthisiriporn
- Lecture 1 derivativesEnviado porzeeshanshan
- LeasesEnviado porsam
- World Oil_Market or MayhemEnviado pormarflo9989
- Chapter 13Enviado porNouman Mujahid
- ZERODHAEnviado porAmit Kumar
- EFB344 Lecture06, Forwards and Futures 2(1)Enviado porTibet Love
- TN7 Hedge Ratios and Futures ContractsEnviado porsidhantha
- Commodity Daily Prediction Report by TradeIndia Research 09-10-2017Enviado porAashika Jain
- Chapter 09 Advanced SolutionsEnviado porYing Liu
- NinjaTraders GetStartedEnviado portrbvms
- FuturesEnviado porShailendra Garg
- Chapter 3Enviado porsunilp14
- The Agricultural Futures MarketEnviado porBharath Chaitanya
- Project Report of DebasishEnviado porDebasish Gupta
- Applications of Stock FuturesEnviado porRuchir Kelkar
- Kamlesh ProjectEnviado porAmit Kumar
- FuturesEnviado porAiman Fatima
- Chap 007Enviado pordrakowam

- Mitigate Your Collateral RiskEnviado porblaq
- Independent equity research: How we do it, and why it matters to investorsEnviado porPutnam Investments
- Reliance Fixed Horizon Fund - 15 - Series 2 Application FormEnviado porrkdgr87880
- CH30Enviado porKalyan Bhaskar
- Introduction. Derivatives (1)Enviado porPhillip Ratliff
- Corporation QuizEnviado porjano_art21
- Wykład V.L.SmithEnviado porprnoxxx
- The Sixth Sense in the Stock Market - Spot the Next Big Trends - Feb 2011 (Upload)Enviado porHBJ Capital Services Private Limited
- Unit 3 Financing of MNCEnviado porSaravananSrvn
- Bangladesh Bank Fdi InstructionEnviado porOsman Goni
- Dividend PolicyEnviado porhizelarya
- Foreign Exchange in PDFEnviado porArun Kumar
- Credit RiskEnviado porAnnyatamaBhowmik
- Halcon Apollo Case StudyEnviado porJohn D
- Fernadez (2007) - 110 Common Errors in Company ValuationsEnviado porblackmeo
- Growth Analysis of Stock Market in India: An Empirical StudyEnviado porEditor IJTSRD
- 51903182-Rosner-Testimony-March-30-2011Enviado porDinSFLA
- Emerging Capital Markets and GlobalizationEnviado porGinna Romero
- Gatheral.1Enviado porZhenhuan Song
- Kohler DCFEnviado porJennifer Langton
- Financial ManagementEnviado porMahwish Malik
- 050 Chapter 2-Fin548Enviado porkalpkomal
- Day Trading the Currency Market - Kathy Lien (2005) A40Enviado porhenryraymond
- Interim Order in the matter of Green India Infra Projects LimitedEnviado porShyam Sunder
- Stephan Schulmeister: The struggle over a financial transaction tax: a politco-economical farce.Enviado porthewolf37
- One Click Trader Manual ENGEnviado porUmmu Hafiz
- RWE DF 2006Enviado porJORGE
- Ch14 13ed Stock Divid & Repurch MinicMasterEnviado porAdhitia Pahlawan Putra
- Bo Dincer | New York City | Fixed Income Trader | Baris Dincer | Maritime CapitalEnviado porBONDTRADER
- Basel II Capital Accord Report at SBPEnviado porAamir Raza