Notes On Stock Index Future Contracts

Advisors and investors would do well to pay as much attention to the expected volatility of any portfolio or investment as they do to anticipated returns. Moreover, all things being equal, a new investment should only be added to a portfolio when it either reduces the expected risk for a targeted level of returns, or when it boosts expected portfolio returns without adding additional risk, as measured by the expected standard deviation of those returns. Lesson 2: Don’t assume bonds or international stocks offer adequate portfolio diversification. As the world’s financial markets become more closely correlated, bonds and foreign stocks may not provide adequate portfolio diversification. Instead, advisors may want to recommend that suitable investors add modest exposure to nontraditional investments such as hedge funds, private equity and real assets. Such exposure may bolster portfolio returns, while reducing overall risk, depending on how it is structured. Lesson 3: Be disciplined in adhering to asset allocation targets. The long-term benefits of portfolio diversification will only be realized if investors are disciplined in adhering to asset allocation guidelines. For this reason, it is recommended that advisors regularly revisit portfolio allocations and rebalance

FTSE Bursa Malaysia KLCI Futures (FKLI) is a capitalisation-weighted stock market index, composed of the 30 largest companies on the Bursa Malaysia by market capitalisation. Bursa Malaysia Derivatives (BMD) offers 3 categories of derivatives which are Commodity Derivatives, Equity Derivatives and Financial Derivatives. In our case study, KLCI May futures contract is under the equity derivatives.

Spot deferred contract has some characteristics of forward sale but is more flexible since the SEC sellers have a choice when to deliver the gold. Though the threshold for this vehicle to hedge risk is very high, only for companies in good shape in terms of reserves, costs and leverage, American Barrick’s excellence qualifies it to implement this vehicle. We regard it a salutary vehicle, to the effect of which the gradually increasing use of it in American Barrick

The current 50% hedging policy executed at the fund level has served well for OTPP for the past ten years, contributing to the fund’s positive returns. The FX Hedge Program not only has minimized the downside risk, but has also limited the upside potential. If OTPP decided not to implement a hedging program in 1996, they would have lost about $983 million CAD over the ten year period (1995-2005) which is valued at 2% of the portfolio. With the hedging program, OTPP was able to reduce the overall loss to about $469 million CAD, but also limited the gain from the depreciation of the pound.(Exhibit 1) Hedging is an excellent short-term risk minimizing strategy for long term investors, sustaining a continual payout of pensions during volatile times in OTPP’s invested currency markets. Currently, approximately 21% of OTPP’s net assets are exposed to foreign currency risk. Consequently, it is essential that OTPP maintain a risk management program of hedging, as slight currency fluctuations can significantly affect the value of the fund. Similarly to continual renewal of swaps, hedging can be a very expensive risk management strategy.

​My bank account currently provides a .25% annual percentage yield. Therefore, where I could gain $260 in a one year period with the futures price, I would gain much less if it were in my bank account. $3,449 X .0025 = $8.62 would be the amount I would gain which is a difference of $251.38 that I could possibly forfeit if I decided to use this method instead. While there are many options for investing, I would pick the futures price option over my back account and their CD-options, which is still only .71% for one year. This is

Current prices are listed and the current value of the cash portfolio representing purchasing costs at these prices is $-2,376,547.00. The portfolio values are most commonly thought of as positive values that include both revenue and input cost components. In Case 1, however, the portfolio is made up of only purchasing input cost components, without regard to revenue. Henceforth, the negative portfolio represents future expenses, and the risk considered is that input prices will increase, resulting in higher costs of purchasing. In the hedging strategies implicate forward or futures contracts, the current value of the cash portfolio is equivalent to Wo, the initial portfolio value, because the current values of entire futures contracts and forward contracts at initiation are zero. When lengthy positions in options are used, the premiums represent a primary outlay of funds that is added or subtracted from the current value of the cash portfolio in the equation for the primary portfolio value

The main purpose of this game is to identify and respond to the risk in the market. At the beginning of the game, as the trend in the market has not been identified, small trade size of futures was buy/sell and close off immediately after I observed that the market price is changing. As a general rule, I long futures while the futures appeared to be in in bullish market and, in contrast, short them in bearish market. When the market price on futures is on an upward trend, I long futures at market price and sell them when price has raised. In contrast, I short futures contracts at market price and buy them back while the price has dropped to a lower price than the origin price that I sold. One thing to note that there are times that while I am holding on a long

Established in January 1999, Pine Street Capital (PSC) was a market-neutral hedge fund that specialized in the technology field, facing market risk and trying to decide whether and which way to use in order to hedge equity market risk. They choose technology sector because the partners of PSC felt that they have enough ability to evaluate this sector and specially be good at picking out-performing stock. Short-selling of NASDAQ and options hedging strategy are the two major hedging choices for PSC. Either strategy has its own advantages in different economic periods and conditions. The fund has just through one of the most volatile periods in NASDAQ 's history, and it was trying to decide whether it should continue its risk management

Again, because of the disadvantages with respect to long term illiquidity, futures are also not a suitable solution.

2. If the NASDAQ index falls, an increase in the value of the puts may approximate the loss in the portfolio’s value. The protective put limits the portfolio’s downside

Hedging can be defined as a risk management mechanism or strategy which is used to prevent the chances of incurring losses which arise as a result of fall in prices commodities or currencies. It is a technique which is majorly used by the investors in protecting their capital against the effects of the economic situations such as inflation whereby the investors invests in the high yield financial instruments or take a position to cushion them against such effects (Investopedia, 2012).

Exchange Traded Funds (ETFs), similar in many ways to mutual funds, are investment funds traded on stock exchanges. ETFs track the performance of commodities, bonds, and large indices such as the S&P 500 (SPX), NASDAQ (IXIC), Dow Jones (DJI), etc. Much like stocks, ETFs experience price changes throughout the trading day in which they are bought and sold. Fundamentally, the prices of assets traded remain close to, but not always equal, to its net asset value. Largely attractive due to lower costs, flexibility, minimal capital gains taxes, and leverage for market exposure, ETFs have become popular amongst investors. With a recent influx of ETF investments, the risks associated can have severe ramifications to the individual investor and financial markets. To mitigate these risks, ETFs can have options written against them as a hedging strategy for speculative investors.

Behind their construction is the notion that contemporary information, whether asset specific or market wide, can predict expected returns. A large body of empirical evidence finds significant returns to these rule based portfolios, suggesting the predictive power of the trading signals from which they are constructed. The performance of trading strategies is an intriguing feature for both financial economists - who read the implied predictability as a challenge for models of market efficiency - and financial practitioners - who exploit strategy performance for tactical portfolio allocation. This thesis investigates various trading strategies in futures markets, aiming to assess their economic value, distinguish sources of associated risk premia and to understand the effect of their implementation on the wider futures market.

This paper explores several published articles that report on results from trading commodities and currencies as it relates to portfolio management. A few of the articles that I researched gave me a more general idea of how to invest in commodities and currencies. Some of the articles vary in that each of them has a different opinion on portfolio theory. For example, in their article, Jensen, Johnson, and Mercer claim that commodity futures are equal to equity returns over time and that they offer significant diversification benefits to an investment portfolio. In

This can especially noticed in agricultural commodities where the weather plays a major role in affecting the fortunes of people involved in this industry. The futures market has evolved to neutralize such risks through a mechanism; namely hedging.