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Hedging Equity and Equity Futures

IndianMoney.com Research Team | Updated On Monday, November 17,2014, 05:48 PM

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Hedging Equity and Equity Futures

 

 

Equity in a portfolio can be hedged by captivating an opposite position in futures. To protect your stock selecting against systematic market risk, you short futures when you buy equity. Or else long futures when you short stock.

There are many different ways to hedge, and one among them is the market neutral approach. In this kind of approach, a corresponding dollar amount in the stock trade is taken in futures. Procure 10000 GBP value of Vodafone and short 10000 worth of FTSE futures.

Another means to hedge is the beta neutral. Beta is the kind of historical correlation between a stock and an index. If the beta of a Vodafone is 2, then for a 10000 GBP long position in Vodafone, will hedge with a 20000 GBP equivalent short position in the FTSE futures (the Index that Vodafone trades in).

 

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