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Derivatives and Risk Management, 1st Edition
book

Derivatives and Risk Management, 1st Edition

by Sundaram Janakiramanan
May 2024
Intermediate to advanced content levelIntermediate to advanced
542 pages
27h 26m
English
Pearson India
Content preview from Derivatives and Risk Management, 1st Edition
Hedging Strategies Using Futures 111
F
2
= futures price at time t
2
;
b
1
= basis at time t
1
; and
b
2
= basis at time t
2
.
Assume that the hedge is placed at time t
1
and closed out at time t
2
. en,
b
1
= S
1
F
1
and
b
2
= S
2
F
2
Suppose the hedger enters into a short position at time t
1
at F
1
, closes out the position by taking a long po-
sition in the futures contract at time t
2
at F
2
, and sells the asset in the spot market at S
2
. en the prot or
loss from the futures position is F
1
F
2
. us, the eective price for the hedger is S
2
+ (F
1
F
2
) = F
1
+ b
2
.
If the basis at time t
2
is known with certainty at time t
1
, then the hedger will face no risk, because
they will know for certain what price they will receive for their commodity. However, b
2
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Publisher Resources

ISBN: 9781299447547Publisher Website