Learn hedging with futures — Hinglish notes

5.1.8 · Stock-Market › Futures

Core idea: Agar tumhare paas koi asset hai aur darr hai ki wo giregi, to us asset pe futures sell karo. Jab asset girta hai, tumhari physical holding ki value kam hoti hai LEKIN tumhari futures position gain karti hai (kyunki tumne upar becha aur neecha wapas khareed sakte ho). Gains aur losses offset hote hain, tumhari total wealth stable rehti hai.

Hedging Kya Hai?

Key principle: Negative correlation. Tumhara hedge tumhari main position ke ulta move karta hai. Jab ek loss mein hota hai, doosra gain mein hota hai.

Futures Hedging Ke Liye Kyun Perfect Hain

Leverage & Capital Efficiency: Tumhe puri price upfront nahi deni hoti (sirf margin ~10-20%), isliye tum badi positions ko hedge kar sakte ho bina sara cash tie up kiye.
Standardization & Liquidity: Futures contracts standardized hote hain (fixed size, expiry, terms) aur exchanges pe trade hote hain, isliye tum asaani se enter/exit kar sakte ho bina custom terms negotiate kiye.
Mark-to-Market: Daily settlement matlab gains/losses incrementally realize hote hain, expiry pe ek saath nahi. Ye tumhare underlying asset ki daily volatility se match karta hai.

Mechanics: Hedging Kaam Kaise Karta Hai

Scenario 1: Tumhare Paas Stock Hai, Girne Ka Darr Hai (Long Hedge)

Tumhari position: Tumhare paas Reliance ke 1,000 shares hain ₹2,500/share pe (total ₹25,00,000).

Tumhara darr: 2 mahine mein market crash. Reliance ₹2,200 tak gir sakta hai.

Hedge action: 1 Reliance futures contract (lot size 1,000 shares) ₹2,500 pe sell karo.

Hedge Outcome Ki Derivation:

Maano:

$S_{0}$ = aaj ka spot price = ₹2,500
$S_{T}$ = expiry pe spot price
$F_{0}$ = aaj ka futures price = ₹2,500
$N$ = shares ki sankhya = 1,000

Hedge ke bina: $Wealth at T = N \cdot S_{T}$

Hedge ke saath: Tumhara physical stock $N \cdot S_{T}$ worth hai. Tumhara futures P&L hai: $Futures P&L = N \cdot (F_{0} - S_{T})$ (Tumne $F_{0}$ pe becha, market $S_{T}$ pe settle hua. Agar $S_{T} < F_{0}$ , to profit.)

Total wealth: $Total = N \cdot S_{T} + N (F_{0} - S_{T}) = N \cdot F_{0}$

Spot price $S_{T}$ cancel ho jaata hai. Tumhari wealth == $N \cdot F_{0} = 1000 \times 2500 = ₹25, 00, 000$ pe lock== ho jaati hai, chahe market kahin bhi jaye.

Scenario 2: Tum Baad Mein Stock Kharidoge, Badhne Ka Darr Hai (Short Hedge)

Tumhari position: Tum ek fund manager ho. Tumhare paas ₹18,00,000 cash hai, 3 mahine baad Nifty stocks mein invest karoge (client approval ke baad). Current Nifty = 18,000.

Tumhara darr: Market 19,000 tak rally kare invest karne se pehle. Tum zyada price pe kharidoge, kam shares milenge.

Hedge action: Nifty futures 18,000 pe buy karo. Nifty lot size = 50 units ke saath, contract value = $50 \times 18, 000 = ₹9, 00, 000$ . ₹18,00,000 exposure ko hedge karne ke liye, 2 lots kharido ( $2 \times ₹9, 00, 000 = ₹18, 00, 000$ ).

Derivation:

Maano $S_{0} = 18, 000$ , $S_{T}$ = kharidne ke waqt Nifty.

Hedge ke bina: Tum $S_{T}$ pe shares kharidoge. Agar $S_{T} = 19, 000$ , to zyada pay karoge.

Hedge ke saath:

Futures P&L: $N \cdot (S_{T} - F_{0})$ (tumne $F_{0}$ pe kharida, market $S_{T}$ pe settle hua)
Tum spot $S_{T}$ pe invest karte ho, lekin futures ne tumhe $N (S_{T} - F_{0})$ ka gain diya

Net cost: $Effective cost = N \cdot S_{T} - N (S_{T} - F_{0}) = N \cdot F_{0}$

Phir se, futures price pe lock in ho gaye.

Hedge Ratio: Kitna Hedge Karna Hai?

Perfect hedge ke liye, $h = 1$ (dollar-for-dollar hedge karo).

Lekin: Practice mein, futures aur spot hamesha 1:1 nahi chalte. Hum beta se refine karte hain:

$h^{*} = β \cdot \frac{V _{spot}}{V _{futures}}$

jahan $β$ = tumhare asset ki futures contract ke saath sensitivity.

Example: Tumhare paas ₹1,00,00,000 ka HDFC Bank stock hai. Nifty futures lot = ₹9,00,000. Nifty ke saath HDFC ka beta = 1.2.

$h^{*} = 1.2 \cdot \frac{1 , 00 , 00 , 000}{9 , 00 , 000} \approx 13.33 lots$

Hedge karne ke liye 13 Nifty futures sell karo. (13 kyun, 11 nahi? Kyunki HDFC Nifty se 20% zyada move karta hai, isliye offset karne ke liye zyada futures chahiye.)

Worked Example: Farmer Wheat Ko Hedge Kar Raha Hai

Setup: April hai. Tum ek farmer ho, October mein 10,000 kg wheat harvest hone ki umeed hai. Current spot = ₹25/kg. Tumhe darr hai ki harvest tak prices ₹20/kg tak gir jayengi (har jagah achha monsoon hone ki wajah se).

Step 1 – Exposure identify karo: Tum October mein wheat bechoge. Tum price ke girne se exposed ho.

Step 2 – Hedge action: October delivery ke liye wheat futures ₹25/kg pe sell karo. (Maano 1 contract = 10,000 kg.)

Ye step kyun? Tum aaj ₹25 ka selling price lock kar lete ho. Chahe spot crash ho jaye, futures P&L compensate karta hai.

Step 3 – Harvest pe (October):

Spot ₹20/kg tak gir jaata hai (tumhara darr sach ho gaya).

Physical sale: 10,000 kg ₹20 pe becho = ₹2,00,000.
Futures P&L: Tumne ₹25 pe becha, market ₹20 pe settle hua. Gain = $10, 000 \times (25 - 20) = ₹50, 000$ .

Total revenue: ₹2,00,000 + ₹50,000 = ₹2,50,000 = 10,000 × ₹25.

Tumne apna target price achieve kar liya!

Alternative scenario: Spot ₹30/kg tak badhta hai.

Physical sale: 10,000 kg × ₹30 = ₹3,00,000.
Futures P&L: Loss = $10, 000 \times (25 - 30) = - ₹50, 000$ .

Total: ₹3,00,000 − ₹50,000 = ₹2,50,000. Phir bhi ₹25 pe locked.

Ye kaam kyun karta hai? Futures aur spot expiry pe converge hote hain. Tumhari combined position price risk khatam kar deti hai.

Basis Risk: Jab Hedges Perfect Nahi Hote

Expiry pe, basis = 0 (convergence). Lekin hedge ke dauran, agar tumhara asset aur futures contract perfectly track nahi karte, to tumhe basis risk face karna padta hai.

Example: Tumhare paas Tata Steel shares hain, Nifty futures se hedge karte ho. Tata Steel company-specific news ki wajah se Nifty se underperform kar sakta hai. Tumhara hedge losses ko poora offset nahi karega.

Basis risk kyun hota hai:

Asset mismatch: HDFC ko Nifty se hedge karna (HDFC-specific futures nahi).
Time mismatch: 4 mahine ke liye hedge karna, lekin sirf 3-month futures available hain—tum rollover karte ho, aur prices badal chuki hoti hain.
Quality/location differences: Mumbai wheat ko Punjab-delivery futures se hedge karna.

Galat idea sahi lagta hai kyunki: Textbook formula perfect cancellation dikhata hai.

Ye galat kyun hai: Wo assume karta hai ki:

Futures tumhare asset ke saath perfectly correlate karta hai ( $β = 1$ , zero basis risk).
Koi transaction costs nahi.
Tum expiry tak hold karte ho (early exit nahi).

Reality: Basis fluctuate karta hai. Agar basis tumhare against wide ho jaye, to hedge underperform karta hai.

Fix: Beta ke saath cross-hedge ratio use karo. Basis monitor karo. Accept karo ki hedging risk reduce karti hai, khatam nahi.

Hedging Ki Cost

Hedging free nahi hai:

Opportunity cost: Agar prices favorably move karein, tumhara hedge purani price lock karta hai—tum upside miss kar dete ho.
Transaction costs: Brokerage, exchange fees, ST.
Margin requirements: Tumhe margin collateral ke roop mein deposit karta rehna padta hai. Ye capital tie up karta hai, aur margin khud par generally interest nahi milta (koi bhi interest broker policy pe depend karta hai, futures markets ki general feature nahi hai).

Trade-off: Certainty vs. Upside. Hedgers speculation ke upar stability choose karte hain.

Strategic Hedge Types

Full hedge ( $h = 1$ ): Price poori tarah lock karo. Best tab jab tumhe zaroor ek fixed budget/revenue target meet karna ho (jaise airline fuel costs, dollar receivables wala exporter).
Partial hedge ( $h < 1$ ): Sirf 50-70% exposure hedge karo. Kuch upside retain karo agar prices favorably move karein. Wo firms use karti hain jinki flexible needs hain ya jab basis risk zyada ho.

Dynamic hedging: Hedge ratio ko samay ke saath adjust karo jaise asset value ya volatility badlti hai.

Flashcards

#flashcards/stock-market

Futures se hedging ka primary goal kya hai? :: Price risk ko reduce ya eliminate karna kisi existing position ka, profit banana NAHI. Tum wealth stabilize karne ke liye ek price lock karte ho.

Agar tumhare paas ek asset hai aur darr hai ki price giregi, to tum kaunsi futures position lete ho?

Futures sell karo (short futures). Jab asset girta hai, futures gain spot loss ko offset karta hai.

Perfect hedge ki total wealth ka formula kya hai?

Hedged Wealth = N · F₀ (initial futures price pe locked, chahe final spot price kuch bhi ho).

Futures hedging mein basis kya hai?

Basis = Spot price - Futures price. Ye dono ke beech ka difference measure karta hai, aur ideally expiry pe zero ho jaata hai.

Basis risk kyun hota hai?

Asset mismatch (alag underlying se hedge karna), time mismatch (expiry need se match nahi karti), ya quality/location differences. Hedge exposure ke saath perfectly correlate nahi karta.

Jab beta involved ho to hedge ratio formula kya hai?

h* = β · (Value_spot / Value_futures). Beta account karta hai ki tumhara asset futures contract ke relative kitna move karta hai.

Ek wheat farmer ko darr hai ki harvest pe prices girengii. Farmer kya karta hai?

Abhi wheat futures sell karo. Harvest pe, agar spot price girti hai, to futures gain physical sale revenue kam hone ko compensate karta hai.

Hedging karte waqt trade-off kya hai?

Tum upside potential sacrifice karte ho (agar prices favorably move karein) downside protection (stability) paane ke liye. Ye certainty vs. profit opportunity hai.

Connections

5.1.01-Introduction-to-Futures: Hedging futures ka ek primary use-case hai (vs. speculation).
5.1.05-Basis-and-Convergence: Basis dynamics hedge effectiveness determine karte hain.
5.1.09-Speculation-with-Futures: Ulta mindset—speculators profit chahte hain, hedgers safety chahte hain.
4.2.06-Portfolio-Beta: Beta optimal hedge ratio calculate karne ke liye use hota hai cross-hedging mein.
6.1.04-Options-for-Hedging: Options asymmetric hedging dete hain (downside protection, upside retain) lekin ek premium cost karta hai.

Recall

Feynman 12-Saal-Ke-Bacche Ko Samjhao

Socho tumhare paas 100 marbles hain jo tum agle mahine bechoge. Abhi, bacche ₹10 per marble dete hain, isliye tumhe ₹1,000 milne ki umeed hai. Lekin tumhe darr hai—kya hoga agar koi naya toy aaye aur kisi ko marbles nahi chahiye? Price ₹5 tak gir sakti hai.

Hedging aisi hai: Aaj, tum apne dost ke saath ek deal karte ho. "Main tumhe 100 marbles agle mahine ₹10 each pe bechne ka waada karta hoon, chahe kuch bhi ho jaye." Tumhara dost maan jaata hai (usko lagta hai marbles aur popular ho sakti hain).

Agle mahine, agar marbles market mein sirf ₹5 ki hain, tum market mein ₹500 mein bechte ho, LEKIN tumhara dost tumhe extra ₹500 deta hai deal ki wajah se (usne ₹10 pe "kharida" jab market ₹5 hai, isliye tum usse ₹500 gain karte ho). Total: ₹1,000. Safe!

Agar marbles ₹15 ho jaayein, tum market mein ₹1,500 mein bechte ho, lekin tumhara dost tumse ₹500 maangta hai (kyunki usne ₹10 lock kiya, tumhe use difference compensate karna padega). Total: ₹1,000 phir bhi.

Tumne extra paisa banane ka mauka chod diya, lekin tumne khud ko paisa kho jaane se bhi bachaya. Yahi hedging hai—excitement trade karo safety ke liye.

Stabilize wealth (goal safety hai)
Hedge ratio = exposure match karo
Inverse position (stock rakho → futures sell karo)
Expiry convergence (basis → 0)
Lock in price (profit pe certainty)
Daily mark-to-market (gradual settlement)

Summary

Futures se hedging uncertain price risk ko jaane-maane outcomes mein badal deti hai. Apni physical exposure ke ulti position futures mein lekar, tum ek zero-sum game create karte ho: ek mein losses doosre mein gains se offset hote hain. Math elegant hai—total wealth initial futures price pe lock ho jaati hai—lekin real-world basis risk, transaction costs, aur upside ki sacrifice hedging ko ek strategic choice banate hain, free lunch nahi. Full hedges use karo jab fixed targets meet karne hon; partial ya dynamic hedges use karo jab flexibility matter kare. Hedging financial insurance hai: tum pay karte ho (opportunity cost mein) peace of mind ke liye.