Unit 3 · Level 3 · Futures & perps
Hedging with futures
Airlines short jet-fuel risk with oil futures; farmers lock in harvest prices; funds fearing a rough quarter short index futures instead of dumping every holding. This is what futures were BUILT for: not louder bets, but transferring a risk you don't want to someone paid to carry it. A hedge trades away upside to buy certainty.
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What you get asked
Why would a fund short index futures rather than sell its holdings?
Selling 50 positions costs spreads, taxes and time. One futures short neutralizes broad market exposure and lifts off just as fast. Stock-specific risk, note, remains.
Your portfolio is worth €60,000 and tracks the index closely. One mini index future covers €12,000 of exposure. How many contracts do you sell for a full hedge?
Hedge ratio = exposure ÷ contract notional = €60,000 ÷ €12,000 = 5 contracts. If the market drops 10%, the futures gain roughly offsets the portfolio's loss.
Put the hedging workflow in order
A hedge is a temporary raincoat, not a new personality. Pros put it on for the storm and take it off after.
A full hedge removes downside AND upside. Hedging is buying ___, not chasing profit.
Fully hedged, you've effectively stepped out of the market without selling. That's the product: a known outcome.
The honest cost of hedging with futures:
If the market rallies 10%, your futures short loses what the portfolio gains. Hedging is never free. You pay in surrendered upside, plus roll costs if it drags on. 🐜
The rest of this unit
Obligations, basis, funding and hedges: the contracts professionals run on.