The basic principle of hedging
The idea behind hedging risks is to reduce investors' exposure to stock price fluctuations. If an investor owns a stock portfolio, his risk exposure is the decline of the stock price. Hedging can be done through many different types of financial instruments, including stock indexes representing stock portfolios.
risk reduction
Investors may decide to reduce risk at some stage in their investment career. This may happen when they become more conservative, or when they change their views on stock market trends. Hedging risks has many advantages, which can be realized by using stock index futures.
future
A futures contract is an obligation to buy and sell a specific target product on a specific date in the future. Standard & Poor's 500 index futures contract is the most widely traded futures contract in the United States. The contract is traded on the Chicago Mercantile Exchange. Dow Jones Industrial Average contracts and Nasdaq 100 index contracts are also traded on the Chicago Mercantile Exchange. Futures contracts are leveraged products, which means that investors can control a higher level of funds and deposit a small part of them in deposit-taking accounts. To open a futures account, investors must get in touch with a futures brokerage company. A futures brokerage company is a clearing member of a regulated exchange.
How to hedge with stock index futures
Investors who want to hedge their portfolios need to calculate the amount of capital they want to hedge and find a representative index. Suppose an investor wants to hedge a $350,000 stock portfolio, she will sell a specific futures index worth $350,000. The Standard & Poor's 500 Index has the widest coverage of all indexes and is a good representative of large-cap stocks. The futures contract of the Standard & Poor's 500 Index is worth $250, multiplied by the price of the futures contract. If the index price is close to $65,438+0,400, the value of the S&P 500 index contract will be $350,000. The contract value of E-mini Standard & Poor's 500 Index, which is traded synchronously with the standard contract, is only 20% of the standard contract value. The price of each mini contract is 50 times that of the Standard & Poor's 500 index futures contract. In order to hedge the stock risk of $350,000, investors can short one S&P 500 futures contract or five E-mini contracts. Before the futures contract expires, investors either buy back the contract or transfer to the next season's contract. CME Standard & Poor's 500 index futures contracts will expire in March, June, September and 65438+February.