Value Hedge Funds Explain Howan Option On The FTSE 100 Could Be Used To Hedge A Pension Fund Value Against Uncertainities?

Explain howan option on the FTSE 100 could be used to hedge a pension fund value against uncertainities? - value hedge funds

You could a put option to the right (but not sell the obligation) to buy the underlying instrument, are in this case, the FTSE 100, at a specified price within a specified period.

Let's see some actual numbers. The FTSE100 is now on 6087th You want some protection when he is 100 points or more falls. You might, for example, the purchase of a put option in June 5975, which entitles the holder to sell the index in 5975 to. It will cost 87p per contract. Let's t ake two scenarios for the period of the option, (a) the index rises by 500 points, (b) the index falls by 500 points.

(a) if the FTSE100 rises, you could be a network of 413 points (500 minus 87 to make, you pay for the option hess word because it has no value to sell, the FTSE 5975, while in 6587.) If you select get to 500 points earned.

(b) If the index falls 500 points to 5587, the option is 388 (5975-5587). His loss is the sum of the following: the loss of 500 index points, 87 cost of the option and aGain of 388, the value of the option at the end of the option period. This makes a total loss of 199 (-500-87 388) instead of a loss of 500 if you buy the put option. If the index fell again, your maximum loss is 199, if the ground is still covered with this option.

Note that this scenario does not include transaction costs such as commissions, tax considerations or other important things.