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Risk Management for Forward & Futures


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effective beta
= (% change in portfolio value)/(% change in index value)
synthetic positions
risk free=long stock, short stock futures
calculation future value (caution)
it is not always one year, watch for time horizon
pre-investing
taking long Position in futures to create an exposure that converts yet to be received cash Position into a synthetic Equity or bond
yield beta and CTD conversion factor
modified duration and duration, regard them as economically the same
It means to receive the foreign exchange
long position in FX (and how to hedge with forward)
hedging FX and market risk
hedging the foreign market risk gives You foreign risk Free Rate
futures vs forwards
futures more regulated and transparent
Bull spread
buy lower X call, write higher X call
Bear spread
buy higher X put
- 4 options
Butterfly spread with calls
Butterfly spread with puts
buy one put with high X, one put with low X
straddle
long a put and a call on the same X and expiration
Box spread
bull call spread + Bear put spread
call: LIBOR-X
interest rate put and call
Interest rate cap
caps and floors are paid in arrears (the First quarterly Rate today would be used to calculate the payment three months from today)
gamma
change in delta/change in stock price
forward position (long and short)
USD/GBP forward, assuming the need to sell GBP, one needs to take a short forward contract to delivery GBP
Source of Basis risk
Interest Rate differential between Two currencies.
Hedge ratio
the investment has both translation and economic risk. The hedge ratio of translation risk is 1; the asset has positive covariance with the exchange rate movement therefore, the hedge must be more than …
FX transaction risk
the risk that contracted future cash flows become Less valuable in terms of the domestic Currency or that planned purchases become more expensive is known as transaction exposure. derivatives are primarily used to hedge transaction exposure.