36 lines
2.5 KiB
Plaintext
36 lines
2.5 KiB
Plaintext
Chapter 30: Stock Index Hedging Strategies S49
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Actually he would probably buy 15,100 shares of each stock against the index,
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and on every fourth "round" (100 futures vs. stock) would buy 15,000 shares. This
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would be a very close approximation without dealing in odd lots.
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The trader might also use index options as his hedge instead of futures. The
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striking price of the options does not come into play in this situation. Typically, one
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would fully hedge his position with the index options - that is, if he bought stock, he
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would then sell calls and buy puts against that stock. Both the puts and the calls
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would have the same strike and expiration month. This creates a riskless position.
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This position is a conversion.
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Example: Suppose that cash-based options trade on this index, and that these
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options are worth $100 per point as are normal stock options - that is, an option is
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essentially an option on 100 shares of the index. The trader is going to synthetically
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short the index by buying 100 June 105 puts and selling 100 June 105 calls. Assume
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that the index data is the same as in the previous example, that 0.60298 shares of each
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stock comprise the index. How many shares would one hedge these 100 option syn
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thetics with?
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Number of shares = .60298 x 100 contracts x 100 shares/contract
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= 6029.8 shares
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Note that in the case of a price-weighted index, neither the current index value
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nor the striking price of the options involved (if options are involved) affects the
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number of shares of stock to buy. Both of the above examples demonstrate the fact
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that the number of shares to buy is strictly a function of the divisor of the price
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weighted index and the unit of trading of the option or future.
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Hedging a capitalization-weighted index is more complicated, although the
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technique revolves around determining the makeup of the index in terms of shares
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of stock, just as the price-weighted examples above did. Recall that we could deter
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mine the number of shares of stock in a capitalization-weighted index by dividing the
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float of each stock by the divisor of the index. The general formula for the number of
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shares of each stock to buy is:
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Shares of stock N Shares of N F . Futures unit
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= . . x utures quantity x . to buy m mdex of trading
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We will use the fictional capitalization-weighted index from the previous chap
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ter to illustrate these points.
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Example: The following table identifies the pertinent facts about the fictional index,
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including the important data: number of shares of each stock in the index. |