Skip to content
All library documents

Choosing the Futures Hedge Ratio for an Equity Portfolio

Article Quant Q&A · Author: secretrevaler
Read the original

Summary

The document raises a question about a textbook method for hedging a diversified equity portfolio with index futures. The described approach divides the portfolio’s value by the value of one futures contract to determine a contract count. The questioner asks whether it would be more accurate to compare the portfolio’s number of index units with the index units represented by each futures contract, since spot index and futures prices may differ.

The passage poses this as a conceptual challenge but provides no answer or calculation resolving it. It assumes the portfolio mirrors a well-diversified index and does not discuss beta adjustment, contract multipliers, basis changes, or hedge effectiveness. Readers can identify the distinction between portfolio value and futures contract value, but need additional details about contract specifications and the intended hedge to assess the appropriate ratio.

Key ideas

  • The document considers hedging a diversified equity portfolio with index futures.
  • It questions a contract-count method based on dividing portfolio value by the value of one futures contract.
  • The questioner proposes comparing index units in the portfolio with units represented by a futures contract.
  • No answer is provided, and the passage does not account for beta, contract multipliers, or basis risk.

Tags

EquitiesFuturesPortfolio constructionRisk management
Full text
# Hedging an equity portfolio


# Hedging an equity portfolio












In the section on hedging an equity portfolio, hull talks about how you should divide the value of the portfolio by the value of each future to determine the optimal number of futures contracts(assuming the portfolio mirrors a well-diversified index).

Wouldn't it be more accurate to divide the number of index units in the portfolio by the number of index units in each future? In fact, the former approach only works if the index price is equal to the index futures price.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.