Hedge Fund 101 (3)

trading model

stock index futures

Stock index futures hedging refers to taking advantage of the unreasonable prices that exist in the stock index futures market, while participating in the stock index futures and stock spot market transactions. The practice of trading different maturities and different (but similar) classes of equity index contracts simultaneously in order to earn a spread. The term is used to refer to the difference between the price of a futures contract and the price of a futures contract.

Commodity futures

Similar to stock index futures hedging, commodity futures also have a hedging strategy in which the purchase or sale of a futures contract is accompanied by the sale or A transaction in which a person buys a related contract of another and closes both at the same time. It is somewhat similar to hedging in form, but hedging is the process of buying (or selling) physical goods in the spot market and closing both contracts at the same time. Selling (or buying) futures contracts in the futures market, while arbitrage only buys and sells contracts in the futures market and does not involve spot trading. There are four main types of commodity futures arbitrage: cash hedging, cross-period hedging, cross-market arbitrage and cross-species arbitrage.

Statistical Hedging

Unlike risk-free hedging, statistical hedging is a form of risk arbitrage that uses the historical statistical patterns of security prices to arbitrage, and the risk is whether such historical statistical patterns will continue to exist in the future.

The main idea of statistical hedging is to identify the best correlated pairs of investments (stocks or futures, etc.), and then identify each pair of The long-run equilibrium relationship (cointegration relationship) of investment instruments, when the spreads (residuals of the cointegration equation) of a pair of instruments deviate to a certain extent The first time to open a position is when the spread returns to equilibrium, buying relatively undervalued instruments and selling short relatively overvalued instruments. That is. The main elements of statistical hedging include stock matching transactions, stock index hedging, margin hedging and foreign exchange hedging transactions.

Options Hedging

An option, also known as an option, is a derivative financial instrument that is based on futures. In essence, an option is essentially a separate pricing of rights and obligations in the financial sector, allowing the assignee of the right to set the price at a specified The party that is obliged to perform must exercise its right within the time limit as to whether or not to enter into a transaction. When an option is traded, the party buying the option is called the buyer and the party selling the option is called the seller; the buyer is the assignee of the right. The seller, on the other hand, is the obligor who must perform the buyer's exercise of rights.

The advantage of options is that they offer unlimited returns with limited risk of loss, so in many cases, using options instead of futures for short selling and hedging will offer less risk and higher yields than simply using futures to arbitrage.