Hedging Equity Holdings with Index Futures and Synthetic-Spot Options

Summary

This study compares ways to hedge stock holdings, motivated by investors who hold equities as a base for IPO subscriptions and want to reduce exposure to price swings. It measures hedge costs using annualized futures discounts and compares those costs across index contracts, maturities, and options-based synthetic spot positions. The document reports that discounts vary by contract and maturity, with smaller discounts for IH and IF than IC, and generally larger discounts in nearer expiries. It also notes that synthetic spot positions more often traded at a premium, though they were more often at a discount in the period discussed.

For futures hedging, the study links roll costs to calendar spreads and recommends using the next-month continuous contract while avoiding rapid basis convergence near expiry; it also says earlier rolls can add return. For synthetic-spot hedging, it favors nearer contracts and finds that early rolls reduce overall returns. The reported options approach outperformed futures in the study, partly because selling synthetic spot captured a premium. These findings are period-specific; the supplied text gives no detailed data, test design, or risk-adjusted comparisons.

Key ideas

• Annualized futures discounts serve as a measure of hedge cost.
• Discounts vary across index contracts and tend to be higher for nearer maturities.
• Futures roll costs relate to calendar spreads and the time remaining to expiry.
• The study favors next-month continuous futures while avoiding rapid basis convergence near delivery.
• Its options-based synthetic-spot hedge performed better in the reported comparison, but results may depend on market conditions.

Tags

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