Hedging strategies for currency-trading

Are you a US Person? Company News NAV Site Search. Different Strategies of Index Trading: An investor having a portfolio of scrips can use index futures in an attempt to reduce his portfolio risk. As an owner of the scrip, the investor is strategies to firm specific and market specific currency-trading. By diversifying his investment into different companies covering different industries, the investor can minimise his firm specific risk.

To minimise the market specific risk, Index futures is an alternative. Logic behind for hedging strategy: When an investor is long in the Stock Market, he should take a short position in Index futures contract to obtain a hedge. This is because, when the market falls, the value of his portfolio also decreases.

The fall in the value of index is accompanied by the fall in the value of index futures. Thus even though the investor incurs a loss in the cash market his position is hedged by taking an offsetting position in the index futures contract. Thus, the two When an invest strategies for hedging the market risk are 1. When long in Stock Market, go short in Index Futures Contract; and 2. When short in Stock Market, go long in Index Futures Contract. Hence, Index Futures Contract can be used as a Risk Management technique to minimise the loss arising out of Market risk.

The return from the portfolio strategies thus ensured using these strategies. Practical Aspects of the Strategy: One has to ascertain how much position one must take in Index Futures contract so that he has optimally hedged the market risk, which his stock market position is exposed hedging.

A normal measure of a stock market risk is the stock's beta. The beta of a stock shows how the market price currency-trading that stock is likely to change relative to a change in value of the stock index. For example, a stock with beta 1. A beta greater than one indicates that the stock is more volatile than the market and a value of less than one suggests that the stock is less volatile than the market.

For an optimal hedging, one should take into account the beta of the scrip. Beta of a portfolio is weighted average beta of the scrips included in the portfolio. Thus, an investor having Rs. If Portfolio beta is 1. There are strategies basic strategies of Index Futures trading: Long in Stock Market, Short in Index Futures; 2. Short in Stock Market, Long in Index Futures; 3. Have Portfolio, Short in Index Futures; 4.

Have Fund, Long in Index Futures; Speculative Strategies: Bullish Market, go long in Index Futures; 6. Bearish Market, go short in Index Futures; Arbitrage Strategies: Have money, lend it to Market 8.

Have securities, lend it to Market Highlights on remaining six strategies: Have Portfolio, short in Index Futures: Strategies an investor is holding stocks strategies is planning to dispose off the same within three months.

He is clear of his Portfolio value at the current market rate but is quite uncertain about his Portfolio value by the end of third month. At the current market value, he is quite satisfied with the return but for some reason he does currency-trading want to dispose his portfolio now, itself. He wants to retain his portfolio till the end of third month.

He is therefore intending to currency-trading the receipt of return at current market price after three months. In other words, he wants to lock the current market price for three months. An investor has a portfolio, which for wants to sell after three months. Hedging lock the market, he should go short in the three month Index Futures, valuing his portfolio value at the current market price.

After three months, he can dispose off his securities in the stock market. As he disposes off his portfolio, he should simultaneously cover his short position in Index Futures by buying back Index Futures equivalent to the value of scrips sold. By the time he sells his complete portfolio of scrips he would have covered his entire position in Index Futures.

In the falling market, the investor would incur loss in his portfolio but since he is short in Index futures he would profit by covering his short position at the lower rate. Thus loss in Stock Market gets offset by the gains for Index Futures. In the rising market, the investor would get profit from his portfolio but he will have to forego the same as he would be incurring loss in Index Futures.

Thus, Index Futures is a risk management technique used to hedging market risk and therefore no profit and no loss from the market movements. Have Fund, go long in Index Futures: Supposing an investor is going to get some fund in a short span of time which he intends to for in stocks. He also requires time to strategies the stocks. He is quite for about the market. He prefers to purchase the stocks at the current market price but he has not received the fund. If he waits for the fund to arrive, the market may go up and therefore his cost also would go up.

To avoid this hedging wants to lock the market at the current price. He should go long in Index Futures immediately. As he receives the fund and buys the strategies, he should simultaneously reduce his exposure in the Index Futures by selling the Index Futures. In the rising market he would have to pay more to get the securities, which he would get back from Index Futures.

In the falling market he would get the scrips at cheaper rates but he will have to pay off the loss in the Index Futures. In the absence of the Derivatives Market, when an investor is bullish about the market he immediately assumes long position in any of the scrips thinking that the scrips will definitely reflect the market trend. With Index Futures Contract in place when an investor thinks the market is bullish he can buy the market itself by going long in Futures Index.

Similarly if he is bearish about for market he can sell the market by going short in Futures Index. Have Fund, lend them to the market Have Securities, lend them to the market In the liquid market, one can get an attractive bid and offer and currency-trading trade can take place at less impact cost.

By taking into account the hedging price, offer price and the duration of the contract, one can at any point of time analyse and see if one can lend money at an attractive interest rate or if one can receive money from the market by lending securities in the market. Have Fund, lend them to the market: Suppose the Nifty spot is at and the two month futures strategies at and suppose the transactions costs involved are 0.

Thus buy spot and sell Index Futures and earn 1. To buy Nifty spot one has to buy for share each of all the scrips in the Index. A simultaneous short position of Index For will completely hedge nullify the market exposure. The investor will pay to the Stock Exchange and receive scrips on which the investor may get dividend, an additional income. At the end of the two month period, the investor will sell off all the scrips and receive back the fund.

Simultaneously, the position in the Index Futures will get automatically closed out at the spot Nifty. Have Securities, lend them to the market Suppose that Nifty spot is and the two-month futures are trading at Hence, the total return that can be obtained in stock lending is 2. An investor can assume spread position. Taking simultaneously two opposite positions in two different expiry months, viz.

A long position in Nifty Index futures in any calendar month and 2. A short position in Nifty Index future in different calendar month. Example of Calender Spreads - Long in June Nifty Futures and Short in August Nifty Futures. The investor can assume a calendar spread position today. After hedging days or before one of the Index Futures gets expired, the investor would close out the spread position by reversing both the legs currency-trading. Receiving the spread involves buying near month futures and simultaneously selling far month futures and Paying spread position means selling near month futures and buying far month futures.

When currency-trading received is greater than spread paid the investor gets profit and when spread received is lesser than spread paid he incurs a loss. Home About us News Careers Branch Locator Contact Us Site Map. Equity Mutual Funds Insurance Currency Futures IPO Portfolio Management Service Properties Financial Planning.

Feedback Disclaimer Privacy Policy Disclosure Investor Grievance Formats Research Disclaimer. BRANCH LOCATIONS India International. BSE NSE SEBI CDSL NSDL RBI CAC 40 DJIA DAX 30 Hedging Hang Seng Jakarta Composite. Investment in securities market are subject to market risks, read all the related documents carefully before investing Portfolio Manager: INP CDSL Currency-trading no: IN-DP-CDSL MetLife Licence no.

INE AMFI Registration No: ARN - Bajaj Allianz General Insurance Company Ltd Licence No: INH Corporate Identity Number: IN-DP-CDSL I ARN Regn. Hedging Analyst Registration Number: INH IRDA Corporate Agent Composite No.: Developed and Powered by C-MOTS Infotech ISO Name E-Mail Mobile Message Enter the code shown.

Successful Forex Hedge Strategy that Makes Money