Offset risk with opposite positions: futures, stock index futures, options, FX forwards, cross hedging, and hedging a multi-asset portfolio.
For: learners who know the basics of futures and options and want to manage real risk exposures
Risk warning: forex, CFDs, options, futures and crypto assets usually involve leverage or high volatility, and you can lose more than you put in. This lesson only teaches the concepts; all numbers are for illustration and are not investment advice.
This course uses ideas from the courses below (optional; you can start right away).
A farmer has a silo of wheat and fears prices falling before the harvest. Sell a futures contract, and the gains and losses on the two legs cancel out.
Spot and futures don't move in lockstep. How much should you hedge? The optimal ratio depends on correlation and volatility.
You hold a basket of stocks you don't want to sell, but you fear a market drop? Sell index futures according to the portfolio's beta, and keep only your stock-picking skill.
Futures lock in both sides; options only block the bad side. See how much it costs to "insure" a stock, and how to save on the premium.
After selling an option, use the stock to offset its price risk. But Delta changes with the stock price, so the hedge has to keep adjusting.
An exporter won't receive €1 million for 3 months. If the exchange rate falls, the profit vanishes. What are the trade-offs between a forward contract and an FX option?
An airline wants to hedge jet fuel, but there's no good jet fuel futures contract. It has to borrow the closest-priced instrument instead.
A global portfolio is exposed to US stocks, European stocks, the euro and crude oil all at once. Switch on the hedges one by one and watch total risk come apart piece by piece.
Bond funds fear rate hikes most. Selling Treasury futures by DV01 brings the portfolio's rate sensitivity down, but don't size it by market value.
Roll near-month futures to hedge for a whole year and the price risk is locked on paper, but every roll costs money and margin needs cash. A hedge can also die from cash flow.