Hedging a Stock Porfolio with Futures

Résumé du document

In the following development, basic portfolio management is explained. First, through questions, and in the second part, through a three-shares-composed portfolio. I will use indices futures, and equity futures. Equity futures functioning is the same as other classical futures such as indices futures or commodities futures. For each equity futures, there is a specific initial margin and a specific maintenance margin.

Extraits

[...] The dividends schedule is slightly different between the whole index (and therefore its future contract) and the three assets that compose my portfolio. As we know the importance of the dividend yield in the futures contract pricing, it could entail some gaps in the hedge, and oblige me to adjust my hedge quite often. Is the historic beta reliable? We can wonder if it is reliable because past do not forecast future. Therefore, the hedge efficiency is closely linked to the beta used by the investor. - Huge initial investment required compared to futures initial margin. [...]

[...] In the event of the third Friday not being a business day, the Last Trading Day shall normally be the last business day preceding the third Friday First business day following the Last Trading Day 08.00 17.30 London time, Last Trading Day 08.00 16.30 London time Universal Stock Futures Contract (Cash Settlement) List of contract details in respect of London Stock Exchange shares (08/09/05) Last update 07/05/04 The third hedging solution is to deal with FTSE 100 tracker. In order to hedge my whole portfolio, I have to sell for the same amount of FTSE 100 tracker adjusted by the beta. Advantages: no imperfect hedge due to maturity difference Disavantages: it is very difficult to obtain a perfect hedge, due to the differences between my portfolio reactions and the FTSE 100 evolution. [...]

[...] As we are in a long asset position, we lose money because of that. RBS spot RBS spot 14/ 11/2006 15/11/2006 16/11/2006 17/ 11/ 2006 18/ 11/ 2006 19/ 11/ 2006 20/11/2006 21/11/2006 22/ 11/ 2006 23/ 11/ 2006 24/ 11/2006 The Royal Bank of Scotland spot dropped by during the 10 days. As we are in a long asset position, we lose money because of that. is the historic beta reliable? FTSE 100 spot evolution FTSE 100 spot 14/11/2006 15/11/2006 16/11/2006 17/11/2006 18/11/2006 19/11/2006 20/11/2006 21/11/2006 22/11/2006 23/11/2006 24/11/2006 FTSE 100 spot The FTSE 100 spot dropped by during the 10 days. [...]

[...] Contract Standard: Cash settlement based on the Exchange Delivery Settlement Price. The second hedging solution is to deal with Individual Stock Futures. Advantages: you can track as precisely as possible the evolution of your portfolio, thanks to individual stock futures. No initial investment required except the margin. No correlation problem linked to dividend payment or linked to non reliable beta. Disavantages: The market of individual stock futures is less liquid than Index futures. [...]

[...] As we are in a short sell future position, we earn money thanks to that. BA spot 14/11/2006 15/11/2006 16/11/2006 17/11/2006 18/11/2006 19/11/ 2006 20/11/2006 21/11/2006 22/11/2006 23/11/2006 24/11/2006 BA spot The British Airways spot increased by during the 10 days. As we are in a long asset position, we earn money thanks to that. CW spot 295.00 CW spot 14/ 11/ 2006 15/ 11/ 2006 16/ 11/2006 17/ 11/2006 18/11/2006 19/11/2006 20/ 11/ 2006 21/ 11/ 2006 22/ 11/ 2006 23/ 11/ 2006 24/ 11/2006 The Carphone Warehouse spot dropped by during the 10 days. [...]