Wisdom Trading provides professional Commodity hedging services and prime brokerage access to assist you in managing the risks inherent to your business. Whether you are a commodity producer, end-user, merchandiser or distributor we can tailor our services to meet your demands.
We provide daily research and trade ideas to customers around the globe that are involved in making risk management decisions on a daily basis. Through the use of futures contracts, options on futures contracts, and a combination of both, we work together to minimize customer risk and meet client objectives.
Below is an example of hedging for a stock portfolio using S&P futures.
When calculating a hedge ratio, traders and risk managers would want to compare the value of the instrument of portfolio at risk versus the relative value of the futures contract to derive the number of contracts to be used as below.
Assume the E-mini S&P 500 futures are priced at $2185.00, which results in a notional value of $109,250. Consider a portfolio manager with a $10 million S&P 500 equity risk position who wants to reduce exposure to the S&P 500 index by 10%. She could use E-mini S&P 500 futures by selling futures in a ratio based on the notional value of the futures contract:
Hedge ratio = value at risk ÷ notional value of futures contract
In this case, 10% of $10 million is $1 million to hedge. To calculate the number of contracts needed to hedge this position, divide $1 million by the notional value of the contract, which is $109,250. This equals 9.15, or the equivalent of nine E-mini S&P 500 futures contracts.
Say the S&P 500 index goes down by 3%, from 2185.00 to 2119.50, a drop of 65.5 index points. The portfolio loses 3% or $300,000. If the manager sold nine futures contracts, she would have gained $29,475. This is derived as follows: 2185.00 – 2119.50 = 65.50 index points: 65.50 index points x $50 per point x 9 contracts = $29,475.
The portfolio manager’s net result is $300,000 minus $29,475 = $270,525 or a 2.7% loss rather than 3.0%. She has effectively reduced her losses by 10%.
Businesses in both producing and consuming commodities use hedging as an effective way to reduce their risk. Hedging is available across a broad range of markets and exchanges. You can learn more about the markets we trade and their contract sizes on our global markets page. Regardless of whether your business needs to trade 1 contract a month or 10,000 Wisdom Trading can help you determine the correct contract size to properly hedge your risk.
With over 20 years of trading experience we are your partner for all your hedging needs. Our hedging services are used by small business owners to global fortune 500 companies across all industries. Call us to discuss your business and how we can help hedge your risk.
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