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Hedging Equity and Equity Futures

    IndianMoney.com Research Team | Wednesday, April 15,2009, 11:03 AM
 

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).

IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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