Hedging Through Index Futures | CA Final SFM
What are Index Futures?
Index futures are futures contracts on a stock market index. These are future contracts where the underlying is a specific index of a specific stock market. As one cannot physically buy or sell an index, the index futures are always settled in cash.
How to hedge risk of a stock using Index Futures?
In order to hedge a portfolio of stock with Long Position, the investor has to enter into index future contract with a short position. As long as the contract for index future matures, the stock will be hedged. The following procedure will be required:
Determine the value of stock portfolio at present, i.e.,
= Number of Shares X Spot Price per Share
Determine the beta of Stock with Index
Determine the desired value of Index Future Portfolio
For creating a Perfect Hedge, the Hedge Ratio must be equal to beta. Therefore,
Determine the number of Index Futures to be contracted.
Determine the outcome of the scenario based on given information.
February 02, 2021
February 02, 2020
April 04, 2019
Congratulations…!! CA Harish Wadhwani for scoring 93 marks in SFM (CA Final)
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