Future Trading Strategies

Presenter, Waseem Akram 1PH12MBA52

Future Trading Strategies

• Hedging strategy

• Speculative strategy

• Arbitrage strategy

Hedging Strategy

• Hedge means making an investment to reduce the risk of adverse price.

• Hedgers may take either short or long position

• Hedging is usually done to safeguard the investment and not to make profits.

Examples for hedging strategies

• A US company will pay Rs 10,00,000 for imports from India after 2 months and decides to hedge using a long position in a forward contract to reduce the risk of price changes.

• An investor holds 1000 shares in ABC of Rs 400 each. He fears that the price may fall to Rs 300 hence he hedges using a put position in future contract.

Speculative strategy• Speculators are traders who take positions(short

or Long) based on the anticipation of future price movements.

• Unlike hedgers speculators take risk and participate to make profits.

• Speculators consume as well as feed information to the market and contribute to market efficiency.

Examples of Speculative strategies

• Bullish trend, buy futures: for instance the spot price of a particular share is Rs 100 and the speculator anticipates a bullish market trend i.e. the price if the share may increase to Rs 110 after 2 months.

A speculator may buy 1000 shares at present and make a profit of Rs 10,000 after 2 months

Examples of Speculative strategies

• Bearish trend, sell futures: for instance the spot price of a particular share is Rs 100 and the speculator anticipates a bearish market trend i.e. the price if the share may decrease to Rs 90 after 2 months.

A speculator may sell his shares in futures market at spot price

Arbitrage Strategy

• Arbitragers thrive on market imperfections i.e. the take advantage of price differentials in 2 different markets in order to make profits.

• They buy stocks in a market where the price is less and sell the same in the market where the price is high.

• Arbitrage involves making risk less profits.

Examples of Arbitrage strategies

• Overpriced futures, Buy spot & sell futures: ABC ltd currently trades at Rs1000/ share and one month futures trade at Rs1025/ share.

An arbitrager can make risk less profit by purchasing the stock at spot price and sell the same in one month futures market thus making profit.

Examples of Arbitrage strategies

• Underpriced futures, Sell spot & Buy futures: ABC ltd currently trades at Rs1000/ share and one month futures trade at Rs950/ share.

An arbitrager can make risk less profit by Selling the stocks at spot price and purchase the same in one month futures market thus making profit.