How Can Stock Index Futures Be Used For Hedging?

1708 words - 7 pages

SID: 2399092 351FIN
How can stock index futures be used for hedging?the nature of stock index futuresAs a financial instrument which is used to reduce risk for invstors, stock index futures have some characteristics:1 Stock index futures contracts are based on the share index.2 Stock index futures contracts should stand for those indexes which are authoritative as well as representative.3 The price of Stock index futures contracts is denoted by "points" which are used for share index.4 Stock index futures contracts is a kind of futures contracts which is in terms of cash transactionFuture Hedge, it means in order to lock spot purchase costs or profits in the futures market to establish a certain amount of the cash and futures positions in the opposite direction of the position. To use the futures-related losses to offset or compensate for the spot transaction on the profit and loss, so that to avoid price fluctuation risk.There are two aspects on the principle of hedging:Firstly, the same subject matter of the futures price keeps identical with the trend of spot price. Because the specific commodities or financial assets will be subject to the same economic factors and constraints in the same market environment, so, generally speaking, the two markets' price has the same trend of changes. The stock index futures contracts corresponds the corresponding spot index, so they are basically the same price.Secondly, as the futures contract expiry date drew near, the futures prices and spot prices will be consistent convergence.2. The strategy of hedging.The purpose of hedge is in the stock market, the investors may be faced with tow risks. One is unsystematic risk, another one is systematic risk. The stock index is on behalf of the market, so its risk of decreasing can be regarded as the market systemic risk. The stock index futures contracts based on stock indexes as the subject of standardized contracts, with the subject of stock and have a strong linkage between the index and the trend in the same direction. In addition, stock index futures and margin trading system, stock index futures also have low transaction costs, liquidity and take up less capital and so on. These features of stock index futures hedge make it as systemic risk in the stock market's best varieties.In stock index futures for hedging practice, as the hedge only can avoid the systemic risk of the market. However, the stock of non-systemic risk need to the reasonable portfolio to spread. So the stock portfolio hedging is better than the stock hedge.Also, if investors can not be funds available in a timely manner, the use of stock index futures hedging can help investors save costs.The principle of the same or similar variety. The principles require the investors when they hedge in operation, the choice of varieties and futures to hedge spot varieties of the same or similar as far as possible. If they do that, it can ensure the both of the spot market and futures market price...

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