smart things to know
TRANSCRIPT
SMART THINGS TO KNOW
Hedging with futures
Contd..1. Hedging is an investment strategy to protect against a negative event. A good
hedge reduces the impact of the event if it happens.2. If an investor needs money two months from now and fears a fall in equity
during this period, she can hedge this risk by selling equity index futures today.3. Assume that her portfolio's current value is `100 and she sells the index
futures at `100.4. On the future date, when she actually sells her equity portfolio, assume that
the value has fallen to `80 due to a market crash.5. She will lose `20 on her sale of equity, but gain `20 from her futures position.
The returns are to the desired value of `100. This value is protected irrespective of the market fluctuations.
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