Hedging with futures

Discussion in 'P1.T3. Financial Markets & Products (30%)' started by Sidharth, Oct 10, 2009.

  1. Sidharth

    Sidharth New Member

    7. You want to implement a portfolio insurance strategy using index futures designed to protect the value of a portfolio of stocks not paying any dividends. Assuming the value of your stock portfolio decreases, which strategy would you implement to protect your portfolio?

    Answer is to sell future amount equal to put delta*portfolio value.


    now if portfolio is of $1000.... put delta .5......
    Future short will be $500..


    if portfolio falls by 100 points ..the gain on future will be of 50 points only..thus not proper hedge....
    instead should not we short future equal to portfolio value ??? ($1000)
  2. Formula looks wrong to me:
    short delta * portfolio value / futures contract value
    if S&P 500 futures; e.g.,
    0.5 * (250*4)/250 = 0.5 * 4 = 2 contracts

    so if portfolio falls by 250*$0.4 = $100, each futures contract gains $0.4*0.5 = $0.2 * 250 = $50 per contract. x2 contracts = +100

    David
  3. Sidharth

    Sidharth New Member

    David thanks for reply.

    i think formula should be Portfolio value/(Short Delta*Future)..

    If portfolio value is 500...future is also 500...and short delta is .5
    then manager will need to short 2 contracts to maintain hedge...

    if portfolio goes down by 100 points....loss is 100 points but gain on future will be (Short delta*Future) that is .5*100=50...so by having 2 futures he can save his portfolio from any loss.
  4. ...okay, that's a straight delta hedge, i though it was asking to replicate portfolio insurance ... i maybe don't understand the question...the difference is whether you want to hedge or replicate a put option synthetically (i.e., portfolio insurance) - David

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