Cause futures to protect a portfolio.
An investor with a goodly portfolio of stocks may desire to hedge against a inventory bazaar decline by using futures contracts. A hedge is purchasing a derivative security that Testament assemble profits to indemnify any losses in the portfolio and much avow the portfolio to build up gains provided the marketplace goes up in cost. Futures are accepted for hedging in that of the liquidity of futures contracts and the contrasting inventory marketplace indexes that are represented by futures contracts.
Instructions
1. Dispose which inventory mart index best kind reflects the Essay of your inventory portfolio. The Dow Jones Industrial Criterion is an index of vast, low chip stocks. The S&P 500 is a Wide marketplace index. The NASDAQ 100 index is primarily considerable tech stocks. Pick the index that is the later match to your portfolio.
2. Sell the futures contracts short. Futures sold short will increase in value as the stock index declines. Futures contracts require a margin deposit for the contracts traded.
3. Calculate how many futures contracts you will need to hedge your stock portfolio. The value of a futures contract is the futures price times a multiplier. The futures price will be very close to the stock index of the specific futures contract. Multipliers for the futures listed above are for the DJIA: 5, 10 or 25. For the standard S&P500 and NASDAQ 100: 250 and 100, respectively. E-mini S&P and NASDAQ 100 multipliers are 40 and 20. For instance, the NASDAQ 100 has a value of 1,980, so the e-mini contract covers $39,600 worth of stock. You have a $200,000 tech stock portfolio, so you would need five e-mini NASDAQ 100 futures contracts to hedge your portfolio.
4. Finish if you Testament hedge with the criterion or"e-mini" futures contracts. The average contracts Testament hedge a larger extent of inventory with a single contract. The standard contracts will provide hedging for $250,000 to $300,000 per contract. E-mini contracts have a stock value of $40,000 to $60,000. The deposit requirement is set by the futures exchange and is 7 to 10 percent of the contract value for stock index futures. The e-mini NASDAQ 100 futures have a margin requirement of $3,500 per contract.
5. Monitor the price of the futures contracts and the tracked stock index. As the index declines, the value of the futures position will increase to offset the losses in your stock portfolio. If the stock index goes up in value, be ready to shut out the futures positions to avoid a large loss on the hedging contracts.
