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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.