How to 'hedge' the portfolio with the help of Derivatives? Futures and Options

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Hedge the portfolio with the help of 'Derivatives' (Futures).

I have invested in the Stock Market but I am afraid that my portfolio might fall drastically and it has high probability....

How can I protect myself  from uncertain high probability loss ???

Here Comes into a picture the word 'Hedging'. Now the question arises how can i hedge my portfolio and the answer is 'Derivatives'. Yes my friend it is only possible with the help of derivatives. There are four types of derivatives Forward, Futures, Options and swaps. We will only discuss here about the Futures.

Now understand the concept of perfect hedging with the help of FUTURES. 

Let's take an Example- You have a diversified equity investment 200 cr and available balance in bank 20 cr. Beta of the portfolio - 2.2 (calculated as per specified approach) Nifty CMP: 11010  NIFTY futures 11500 expected fall maximum 10% from here. Now how many futures need to be sold for perfect hedging? 1 Index future has 88 units.

To illustrate the example we have taken two scenarios. Scenario 1 (Where you are right) and Scenario 2 (Where you are wrong) because both the possibilities can happen. But if you see we lost our profit in scenario 2 where the market rises. Hence it becomes the limitation of hedging so the purpose of hedging is only to safeguard you of the volatile movement in the market.

 

In both the scenarios my portfolio was same 220 cr. Before and after hedging so it is perfectly hedge.

 

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