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› Method of transferring Risk to permit the Risk

Bearer to assume two offsetting positions at the
same time so that, regardless of the outcome of
an event, the risk bearer is left in a no win/no
lose position. For example, in the options market,
a stock owner of an underlying stock can write
calls or buy puts. In the same options market, the
short sellers of the underlying stock can buy calls
or write puts.
› |edging involves protecting an existing asset
position from future adverse price
movements. In order to hedge a position, a
market player needs to take an equal and
opposite position in the future markets to the
one held in the cash market .
 ½  

› ½peculation are those who do not have any
position on which they enter in futures and
options market. They only have a particular
view on the market, stock, commodity etc.In
short, speculators put their money at risk in
the hope of profiting from an anticipated price
change. They consider various factors such as
demand supply, market position. open
interests, economic fundamentals and other
data to take their positions.
  
› ë is a trader has no time to track and analyze
stocks, he fancies his chances inpredecting the
market trend ,so instead of buying different
stocks he buys sensex futures.
› On may 1st ,2001 he buys 100 sensex futures
@3600 on expectations that the index will rise
in future .On june 1st ,2001 the sensex rises to
4000 and at the time he sells an equal number
of contracts to close out his position.
› ½elling price :4000*100 = Rs 4,00,000
› Less: purchase cost:3600*100=Rs 3,60,000
› [
Rs= 40,000
 ë
 
› ën arbitrageur is basically risk averse. |e
enters into those contracts were he can earn
riskless profits .When markets are imperfect
,buying in one market and simultaneously
selling in other market gives riskless profits.
ërbitrageurs are always in the look out of for
such imperfections.
› In the futures market one can take advantages
of arbitrage opportunities by buying from
lower priced market and selling at the higher
priced market.In index futures arbitrage is
possible between the spot market and the
futures market.N½ has providing special
software for buying all 50 stocks in the spot
market.
› Take the case of the N½ nifty .
› ëssume that Nifty is at 1200 and 3
months͛Nifty futures is at 1300.
› The futures price of Nifty futures can be
worked out by taking the interest cost of 3
months into account .
› If there is a difference then arbitrage
opportunity exits .
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› Options are used as risk management tools
and the valuations or pricing of the instrumets
are careful of market factors .
› They are four factors affecting the option
premimum:
1. Pricing of Underlying : The premium is
affected by the price movements in the
underlying instruments. For Call options the
right to buy the underlying at a fixed
strike.Price of the underlying price rises so
does its premium .ës the underlying price
falls ,so does the cost of the option
premium. For put options the right to sell
the underlying at a fixed strike.
2-The Time Value of an option ʹGenerally the
longer time remaining until an option͛s
expirations ,the higher its premium will be.This is
because the longer an option͛s lifetime,greater
is the possibility that the underlying share price
might move so as to make the option in the
money. ëll other factors affecting an option͛s
price remaining the same , the time value
portion of an option͛s premium will decrease
with the passage of time.
› 3- Volatility -Volatility is the tendency of the
underlying security͛s market price to fluctuate
either up and down .It reflects a price
change͛s magnitude; it does not imply a bias
toward price movement in one direction or
the other .Thus it is a major in determining an
option premium.The higher volatality of the
underlying stock ,the higher the preimum
because there is greater possibility that the
option will move in the money .
 Interest rates
› In general interest rates have the least
infulence on options and equte approximately
to the cost of carry of a futures contract ,If the
size of the options contract is very high ,then
this factor may take on some importance .ëll
other factors being equal is interest rates rise,
premium costs fall and vice versa.The
relationship can be thought of as an
opportunity cost .
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› ë position undertaken by an investor that would
eliminate the risk of an exiting position or a
position that eliminates all markets risk from a
portfolio in order to be a perfect hedge ,a
position would need to have a 100% inverse
correlations to the initial position .ës such the
perfect hedge is rarely found .
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› ën aggressively managed portfolio of
investment that uses advanced investment
strategies such as leverage ,long ,short
derivatives positions in the both domestic and
international markets with the goal od
generating high returns .Legally hedge funds
are most often set up as private investment
partnership that are open to a limited number
of investors and require a very large initial
minimum investment .
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› d
A ë transactions that
commodities investors undertake to hedge
against possible increase in the price of the
actuals underlying the futures contracts . ëlso
called a long hedge, this particular strategy
protects investor͛s from increasing prices by
means of purchasing futures contracts .Many
companies will to attempt to use a long hedge
strategy in order to reduce the uncertainty
associated with the future prices.
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› ë situation where an investors has to take a
long position in futures contracts in order to
hedge against future price volatility . ë long
hedge is beneficial for a company that knows
it purchase as asset in the future and wants to
lock in the price .ë long hedge can also be
used to hedge against a short position that
has already been by the investor .
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› ë hedging strategy with the sale of futures
contracts are meant to offset a long
underlying commodity position. ëlso known
as short hedge .This type of hedging strategy is
typically used for the purpose of insruing
against a possible decrease in commodity
prices . By selling a futures contract an
investor can guarantee the sale price for a
specific commodity and eliminate the
uncertainty associated with the goods.
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› ën investment technique used to eliminate
the risk of a single asset. In most cases ,this
means taking an offsetting position in that
single asset. If this asset is part of a larger
portfolio, the hedge will eliminate the risk of
the one asset but will have less of an effect on
the risk associated with the portfolio.