On the text book, it is only mentioned that futures heding “ineffectively” reduce opportunity cost; while according to the Stalla practice exam book, futures have nothing to do to reduce market impact. But intuitively, I think it should work. The profit on the future position can somewhat offset the loss due to market impact. What do you guys think?
OC in this context is missing the opportunity to trade, with a futures you lock in the period you want to trade, so the opportunity exists yet I can see what they mean by “ineffective” since the future might be for a longer period of time than an immediate trade you may loose the upside benefit of a short term run-up in the stock…make sense?
I understand what they do with futures to reduce opportunity cost. But I think futures also help reduce market impact with the same rationale. What I don’t understand is that on Stalla practice book the explanation is “using futures hedging doesn’t reduce market impact but only opportunity cost”.
you know the transaction will occur, futures are on exchanges and visible so one could “read” the market and anticipate the impact based on the direction of futures, no change in market impact–only applies to investors who can read futures