Hedging Strategies.
Printed From: The Equity Desk
Category: Market Strategies
Forum Name: Fundamental
Forum Discription: Discuss the operations and finances of any of your companies.Make the other participants aware on the investment opportunities available in a stock on PE free cash flow etc
URL: http://www.theequitydesk.com/forum/forum_posts.asp?TID=1448
Printed Date: 11/Apr/2025 at 9:53pm
Topic: Hedging Strategies.
Posted By: MPD05
Subject: Hedging Strategies.
Date Posted: 12/Dec/2007 at 4:10pm
It is a little difficult to describe in a short message. Broadly speaking, there are three different types of market related risks that one takes in equity trading: 1. Directional risk 2. Volatility Risk 3. Correlation risk Those who bet long or short are essentially running the directional risk. However, one could neutralize the directional risk and just isolate the other two risks. For instance, a simple pair trading strategy (think of going long Infy and shorting TCS, for example), would not run either directional or volatility risk, but isolates only the correlation risk. Another example would be selling volatility (i.e., writing an option) and "delta hedging" in the corresponding stock futures. This position would not have either directional or correlation risk. It will isolate only volatility risk. When one talks about arb strategies, generally one is referring to strategies that do not entail directional risk but has only either correlation or volatility risk. One needs sophisticated models to develop these strategies, execute and monitor them. Edelweiss has the "best of breed" models and strategies. The simple "cash-futures arb" is often referred to as "pure arbitrage" as it neutralizes all three types of risk. That is why, most often, these cash-future arbs produce a return only slightly better than the risk free rate. I havn't followed the JM Financial strategy but if they are producing 8%, it is likely they are engaging in mostly cash-futures arb strategies. In India, the futures and options markets are still in their infancy. So, the volatility and correlation risks are still not priced efficiently. This opens up avenues for building trading strategies to exploit the differences. Edelweiss does this well, as far as I know. |
Replies:
Posted By: basant
Date Posted: 12/Dec/2007 at 4:26pm
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Very informative. can anyone put in more examples. It is really a great learning process because I am a novice at all this.
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Posted By: krishpapy
Date Posted: 13/Dec/2009 at 8:42am
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Fast growing economies often have to contend with a fast
rising currency. In India, the year-on-year rise of the rupee right now
more or less matches the GDP growth figure, and there is little reason
to expect the trend not to be sustained. For the corporate sector that
must deal with the commercial world beyond Indian borders, this means
having to take fresh guard. A strengthening rupee could easily mean
getting priced out of markets overseas. The implications are
particularly severe for the small and medium enterprises that form the
largest component of the export basket. If there is anything they need
desperately at the moment, it is not a goodie bag of sops from the
government, but a workable domestic platform for the trading of
currency futures. This can form part of a hedging strategy to protect
earnings from currency movements. Hedging in the forwards market is a
stock-in-trade for big business nowadays. It is the smaller players,
who are more vulnerable to shifts in the economic environment, who need
access to similar instruments within the domestic financial sector.
Expecting them to use platforms overseas is unrealistic. There are, of course, other components of a
hedging strategy that are accessible to SMEs. Several exporters, for
example, are trying to renegotiate deals in alternate currencies. Even
rupee contracts are no longer unheard of, and not just to former Soviet
bloc markets. Besides that, “invoicing flexibility” has been a special
characteristic of Indian exports down the decades, and there are some
signs that some of the old devices are being deployed again (not all of
them strictly honourable, one should add). Other forms of shipment and
order juggling are also in increasing practice. A somewhat robust
strategy, for example, may involve the use of warehouse space on a
long-term basis in the EU and US. Some operational outsourcing to other
locations may also take place, as the production chain goes global for
optimal efficiency. This could imply more capital outflows, but then,
India is not afraid of that any longer. The government, which is
sitting atop a pile of foreign exchange reserves, should be pleased
with this trend. In all, a successful defence for exporters against the
ravages of a rising rupee always requires a higher degree of worldly
wisdom. This can only be good for Indian business as the world
globalises furiously. http://www.laurensilva.com - ------------- |
Posted By: Hitesh Shah
Date Posted: 13/Dec/2009 at 9:52am
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And this is copied from http://www.financialexpress.com/news/hedging-strategies/226174/ - here . On a lighter note, by editing the post (and thereby acknowledging its existence) do you become an accomplice to copyright violation????    ------------- |
Posted By: FutureBull
Date Posted: 02/Feb/2010 at 5:17pm
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this looks like being done with very clever software ------------- ‘The market always does what it’s supposed to — BUT NEVER WHEN’. |
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Date Posted: 27/May/2016 at 6:49pm
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