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Derivatives and Risk Management by Sundaram Janakiramanan

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6

Hedging Strategies Using Futures

LEARNING OBJECTIVES

After completing this chapter, you will be able to answer the following questions:

  • What is the major motive in hedging?

  • How to hedge using futures?

  • What are the risks in hedging?

  • What is hedge ratio?

  • How to calculate the number of futures contracts to be used for hedging?

BOX 6.1 Energy Companies Make Huge Profits Through Hedging Using Futures

As the regulators tried to avoid the high volatility of oil and natural gas prices in 2008, the producers of oil and natural gas started relying more and more on the futures market to hedge the risk of falling prices. Many energy companies such as the El Paso Corporation, XTO Energy Corporation, and Chesapeake Energy Corporation announced ...

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