Hedging Strategies using Futures (FRM Part 1 2023 - Book 3 - Chapter 6)

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After completing this reading, you should be able to:
- Define and differentiate between short and long hedges and identify their appropriate uses.
- Describe the arguments for and against hedging and the potential impact of hedging on firm profitability.
- Define the basis and explain the various sources of basis risk, and explain how basis risks arise when hedging with futures.
- Define cross hedging, and compute and interpret the minimum variance hedge ratio and hedge effectiveness.
- Compute the optimal number of futures contracts needed to hedge an exposure, and explain and calculate the “tailing the hedge” adjustment.
- Explain how to use stock index futures contracts to change a stock portfolio’s beta.
- Explain the term “rolling the hedge forward” and describe some of the risks that arise from this strategy.
0:00 Introduction
0:27 Learning Objectives
1:19 Short Hedges vs. Long Hedges
5:13 Advantages and Disadvantages of Hedging
6:53 Basis Risk and Its Causes
10:10 Cross Hedging
13:03 The Optimal Hedge Ratio
16:37 The Optimal Number of Futures Contracts Needed to Hedge an Exposure
17:36 Adjusting a Stock Portfolio's Beta using Stock Index Futures
23:23 Rolling Hedge
24:07 Book 3 - Financial Markets and Products Chapter 6

[@bbqchickenlemon]

you explained this concept in a clear, concise and very straightforward manner. you explained something in 24 minutes that took 3 hours for my professor to explain.

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[@eden821]

Love your content, that this is free blows my mind! I hope you are well rewarded in the markets my friend!

[@analystprep]

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[@arungautam3454]

What an awesome lecture! Respect and Love from India.💐

[@TheVeenod23]

Thank you Prof. James Forjan for these tutorials. Much appreciated.

[@analystprep]

Glad you like them!

[@kenzoeddie6972]

InstaBlaster.

[@tanbirmann4559]

Very well explained with some really nice examples. Thank You!

[@analystprep]

Glad you enjoyed it!

[@chonsiris.4271]

Thank you very much for the vdo! I love how you can explain my one semester Derivatives course into 24 mins clip. By the way, I have a question on using stock index futures to hedge our stock portfolio. Because in the spot market of holding stock portfolio, we will benefit if the price go up so we hedge by short futures to reduce the loss just in case if the stock market price goes down right? So what about long futures, how can we use it with our stock portfolio? Thank you in advance. ☺️🙏🏼

[@abdullahnarejo1259]

Q: how a farmer naturally short in the spot market?
Should not be long, since he is expecting the price of his harvest to go up. Thus, buying today in lower rates in spot market and selling high in future market. Should not be this the case?

[@VicSMeIsTeR]

Splendid explanation, could you verify that in the case of 'LONG' hedge, the futures are always bought with fixed price, which implies that an opportunity cost might incur if the prices are lower than expected?
In a nutshell, the LONG hedge does not cover the downside unlike the SHORT hedge which covers upside and downside, since the Producer owns an asset which will reap the benefits from price rise and offset the loss of the 'short sold' futures and vice versa. When we do not own the asset, the only solution is to buy this asset via Future contract and hedge the upside. But if price of the same asset is traded at a discount, then we will encounter the oppoortunity cost of already having bought something at a higher price.

[@fungaindunduma1766]

i found this very helpful - as it was much clearer than text book. thank you

[@analystprep]

Glad it was helpful! If you like our video lessons, it would be appreciated if you could take 2 minutes of your time to leave us a review here: trustpilot.com/review/analystprep.com

[@prabhakarmallik3787]

Great explanation . Love from Nepal

[@analystprep]

Thanks a ton!

[@padmagbadri8986]

this is very useful for ca final sir thanks
kindly make more and more videos like this

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You're welcome!

[@ahsank.]

Professor James's humor is unmatched lol

[@tsunningwah3471]

kjmkm