I am preparing for FRM 2009 can somebody explain me basis risk ? as in I am not able to intuitively understand the explanation given in Hull 6th ed In the Hull book its mentioned w.r.t to 2 time periods t1 and t2 basis = Spot - Fut hence b1=S1-F1 , b2=S2-F2 I would like to know how a hedger take a short or long positions because b2 is unknown
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thank you philip !! I am able to think through after solving couple of questions . I have one more question with reference to min variance hedge ratio , Hull says …a min var hedge ratio of 1 cannot be a ‘perfect hedge’ when the correlation is less than 1 but I solved an assignment question (Hull 6ed question 3.23) in excel spreadsheet . I am getting a min variance hedge ratio of 1.01 and correlation (used correl function in excel) of 0.99 . Am I missing something here ?
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Factor Hedge, I had Hull’s book 6th Edition. I had the question 3.23 for 10 month price change between spot and future price. I used the Excel Data Analysis package to calculate the coefficient of correlation between delta S and delta F. I got 0.980572972(A) for the R and the corresponding sigma for S and F are 0.493333333(B) and 0.511559707© and therefore the H is A * B / C = 0.927265214. I could not find the text you quote. Are you referring to cross-hedge?
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Philip ahh !! thanks for correcting me , I had a typo in one of the inputs . According to you which area should I be focusing more in Hull, I need to put in whatever time it takes to understand completely but …what areas are considered to be most important from Hull ? I started from beginning I am now in 5th chapter . I feel option strategies and hedging , Black scholes are the hot areas from Hull
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Factor Hedge, Hull is always a good reference book. In my opioion, BS (continuous) and binomial (discrete) option models are equally important. FRM is not a CFA exam, it doesn’t have many extensive number crunching problems, FRM more emphasize on conceptual “quantitative” understanding and their applications. Again, reading core materials is not always the most efficient way to absorb the knowledge, try to use Schweser and/or Bionic Turtle to supplement.
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Yes ! what you said is right . I am reading core materials because schweser is still not available ,besides I am planning to complete atleast Hull ,Damodaran a bit of Tuckman and few chapters from Jorion on VaR by June end and would want to take up schweser(along with Jorion - Handbook) , want to finish it by mid sep and then would like to fous on practice exams ,revisions …offcourse would be working on Bionic turtle also all along my preps
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FYI. The FRM forum is up and running.
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