Hedging with Stock Index Futures

FRM
#1

I am going through the Hedging with Futures topic using Kaplan Scheweser and something puzzled me.

While covering optimal hedge ratio, they were explaining how to hedge spot exposure with futures, and due to not perfect correlation between spot and future prices, we need to calculate Hedge Ratio.

But when they started covering Hedging with Stock Index Futures, they just used portfolio beta as hedge ratio. Further materials also suggest that the strategy involve using Index Futures to hedge/ reduce or eliminate portfolio beta. This only be possible if it is an assumption the Future Index equal to Spot market index (pefect correlation). But it is not possible since for example S&P 500 index and S&P 500 Futures are different and changes in one does not equal change in another by the same amount.

If I misunderstood or am wrong, can someone explain it to me?

#2

I think you can assume that they are perfectly correlated here.

What book/page was this on?

#3

It is Book 3, page 81 to the end of the chapter.

#4

After reveiwing, I think you are right to assume they are perfectly correlated.

#5

Thank you. I thought so. Scheweser for FRM somehow is not of the same quality as for CFA program.

#6

I haven’t used them for CFA but one look at the GARP books had me very scared for FRM.

Have you finished your first read through for FRM 1?

#7

Not yet. My strategy is active learning so I actully write down everything, but in a shorter version into my notebook. Slowly but it helps me to get back to them and retain more thing (I did it for CFA Level 1 and 2, passed with first attempt). I am to finish everything before the end of the month and just do practical questions for the rest of the time.

#8

Thats awesome, good luck!