Chapter 3 Hedging Strategies Using Futures Options, Futures, and Other Derivatives, 8th Edition Copyright O John C Hull 2012
Chapter 3 Hedging Strategies Using Futures Options, Futures, and Other Derivatives, 8th Edition, Copyright © John C. Hull 2012 1
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 o a short futures hedge is appropriate when you know you will sell an asset in the future and want to lock in the price Options, Futures, and Other Derivatives, 8th Edition Copyright@ John C Hull 2012
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 and want to lock in the price Options, Futures, and Other Derivatives, 8th Edition, Copyright © John C. Hull 2012 2
Arguments in Favor ofhedging e 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 Derivatives, 8th Edition Copyright@ John C Hull 2012 3
Arguments in Favor of Hedging Options, Futures, and Other Derivatives, 8th Edition, Copyright © John C. Hull 2012 3 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
Arguments against Hedging o Shareholders are usually well diversified and can make their own hedging decisions e It may increase risk to hedge when competitors do not e Explaining a situation where there is a loss on the hedge and a gain on the underlying can be difficult Options Futures, and other Derivatives, 8th edition Copyright o John C Hull 2012
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 Derivatives, 8th Edition, Copyright © John C. Hull 2012 4
Basis risk o Basis is usually defined as the spot price minus the futures price e Basis risk arises because of the uncertainty about the basis when the hedge is closed out Options, Futures, and Other Derivatives, 8th Edition Copyright@ John C Hull 2012 5
Basis Risk Basis is usually defined as the spot price minus the futures price Basis risk arises because of the uncertainty about the basis when the hedge is closed out Options, Futures, and Other Derivatives, 8th Edition, Copyright © John C. Hull 2012 5