35 lines
2.5 KiB
Plaintext
35 lines
2.5 KiB
Plaintext
Chapter 30: Stock Index Hedging Strategies 577
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that leads the investor to believe that the group no longer has the potential to out
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perform the market.
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If the futures are underpriced when one begins to investigate this strategy, he
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should not establish the position. What is gained in tracking error could be lost in
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theoretical value of the futures. Since one is establishing both sides of the hedge
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(stocks and futures) at essentially the same time, he can afford to wait until the
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futures are attractively priced. This is not to say that the futures must be overpriced
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when the position is established, although that fact would be an enhancement to the
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position.
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If one thinks that a particular group will underperform the market, he merely
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needs to decide how many shares of each stock to sell short and then can determine
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how many futures to buy against the short sales in order to try to capture the track
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ing error. If one decides to capture the negative tracking error in this manner, he
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must be careful not to buy overpriced futures. Rather, he should wait for the futures
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to be near fair value in order to establish the position.
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COLLATERAL REQUIREMENTS
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In any of the portfolio hedging strategies that we have discussed in this section, there
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is no reduction in margin requirements for either the futures or the options. That is,
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the stocks must be paid for in full or margined as if they had no protection against
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them, and the hedging security - the futures or options - must be margined fully as
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well. Long puts would have to be paid for in full, short futures would require their
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normal margin and would be marked to the market via variation margin, and short
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calls would have to be margined as naked and would also be marked to the market.
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A trader who has not margined his stocks could use them as collateral for the naked
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call requirements if he so desired.
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SUMMARY
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There have been two major impacts of index futures and options. One is that they
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allow a trader to "buy the market" without having to select individual stocks. This is
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important because many traders have some idea of the direction in which the mar
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ket is heading, but may not be able to pick individual stocks well. The other, perhaps
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more major, impact is that large holders of stocks can now hedge their portfolios
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without nearly as much difficulty. The use of these futures and options against actu
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al stock indices - real or simulated - has introduced a strategy into the marketplace
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that did not previously exist. The versatility of these derivative securities is evidenced |