Hedging with Futures - Formula - Mock #53

CFAI gives the formula of the % change in futures to be (F1 - F0)/S0. Isn’t it supposed to be (F1 - F0)/F0 ?

Funny because I was going back through and noticed the same thing. I think the latter is correct, but would love to hear from others.

maybe F0=S0 :slight_smile:

Nope - different values.

i raised this question several weeks ago. Schweser uses Fo in the denominator and CFAI uses So. I would think it should be Fo. Never got an answer.

According to Schweser, it’s (F1 - F0)/F0. CFAI text uses (F1 - F0)/S0 all along.

It should be S0 because RH = [VtSt - V0S0 - (Ft-F0)V0]/V0S0 = R + s + R*s - (Ft-F0)/S0. The reason this hedge works is because when you lift the hedge Ft becomes St, so RH = R + R*s + (St-S0)/S0 - (St-F0)/S0 = R + R*s + (F0-S0)/S0 = R + R*s + interest differential. Ignore R*s, you get the conclusion that hedged return = local return + interest differential.