webcab.lib.finance.futures
Class FuturesHedging

java.lang.Object
  |
  +--webcab.lib.finance.futures.FuturesHedging

All Implemented Interfaces:

Serializable

public class FuturesHedging

extends Object

implements Serializable

Within this class we consider the use of futures contracts for the hedging of risks within stock, commodity, bond and currency markets.

See Also:

Serialized Form

Constructor Summary

FuturesHedging()
Creates a new instance.

Method Summary

double	betaHedge(double portfolio, double indexSize, double beta) Returns the number of index futures to short (negative returned value) or buy (positive returned value) in order to hedge the risk from a well diversified stock portfolio.
double	betaModify(double portfolio, double indexSize, double originalBeta, double requiredBeta) Returns the number of index futures to short (negative returned value) or buy (positive returned value) in order to modify the beta of a well diversified stock portfolio to any desired value.
double	closestHedge(double hedgeRatio, double physicalPosition, double contractSize) This method returns the number of futures contracts which provide the closest the a perfect hedge for a physical position.
double	hedgeRatio(double correlation, double underlyingDeviation, double deviationFuture) This method returns the Optimal Hedge ratio of a futures contract.

Methods inherited from class java.lang.Object

clone, equals, finalize, getClass, hashCode, notify, notifyAll, toString, wait, wait, wait

Constructor Detail

FuturesHedging

public FuturesHedging()

Creates a new instance.

Method Detail

hedgeRatio

public double hedgeRatio(double correlation,
                         double underlyingDeviation,
                         double deviationFuture)
                  throws FuturesHedgingDemoException

This method returns the Optimal Hedge ratio of a futures contract.

Parameters:

correlation - the correlation coefficient between the spot price and the futures price

underlyingDeviation - the standard deviation of the underlying assets price

deviationFuture - the standard deviation of the futures price

FuturesHedgingDemoException

closestHedge

public double closestHedge(double hedgeRatio,
                           double physicalPosition,
                           double contractSize)
                    throws FuturesHedgingDemoException

This method returns the number of futures contracts which provide the closest the a perfect hedge for a physical position.

Parameters:

hedgeRatio - the optimal hedge ratio of the physical position

physicalPosition - the size of the absolute physical position

contractSize - the contract size of each futures position

FuturesHedgingDemoException

betaHedge

public double betaHedge(double portfolio,
                        double indexSize,
                        double beta)
                 throws FuturesHedgingDemoException

Returns the number of index futures to short (negative returned value) or buy (positive returned value) in order to hedge the risk from a well diversified stock portfolio.

Parameters:

portfolio - the value of the portfolio

indexSize - the value of the assets underlying one index futures contract

beta - the beta of the portfolio according to the capital asset pricing model

FuturesHedgingDemoException

betaModify

public double betaModify(double portfolio,
                         double indexSize,
                         double originalBeta,
                         double requiredBeta)
                  throws FuturesHedgingDemoException

Returns the number of index futures to short (negative returned value) or buy (positive returned value) in order to modify the beta of a well diversified stock portfolio to any desired value.

Parameters:

portfolio - the value of the portfolio

indexSize - the value of the assets underlying one index futures contract

originalBeta - the beta of the starting portfolio according to the capital asset pricing model

requiredBeta - the beta which we desire for the modified portfolio of stocks and futures

FuturesHedgingDemoException