## Futures

Finance Junkie
Posts: 99
Joined: Sat Apr 07, 2012 10:24 am

### Futures

Pls explain:

You want to implement a portfolio insurance strategy using index futures designed to protect the value of a portfolio of stocks not paying any dividends. Assuming the value of your stock portfolio decreases, which strategy would you implement to protect your portfolio?
a. Sell an amount of index futures equivalent to the change in the put delta x original portfolio value.
b. Sell an amount of index futures equivalent to the change in the call delta x original portfolio value.
c. Buy an amount of index futures equivalent to the change in the call delta x original portfolio value.
d. Buy an amount of index futures equivalent to the change in the put delta x original portfolio value.

According to me, when the value of portfolio is declining one should sell index futures. And the no of futures contract to be sold is computed by "delta of call" multiplied by the portfolio value.

Pls explain where m going wrong.

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

### Re: Futures

Hi Suresh,

I would be glad to help you out with your queries. But as I've asked you before, please post the entire solution given by pristine for both of your queries. This would help me judge whether what was provided was correct or not and perhaps a better way to explain the given solution.

Finance Junkie
Posts: 99
Joined: Sat Apr 07, 2012 10:24 am

### Re: Futures

As asked by you, solution given by pristine is:

The correct answer is Sell an amount of index futures equivalent to the change in the put delta x original portfolio value.

Portfolio insurance strategy is accomplished by selling index futures contracts in an amount equivalent to the proportion of the portfolio dictated by the delta of the required put option. When a decrease in the value of the underlying portfolio occurs, the amount of additional index futures sold corresponds to the change in the put delta x original portfolio value.

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

### Re: Futures

Hi Suresh,

As you already know, you need to protect a falling portfolio by selling futures.
Now the quantity by which you do this should be related to the "put" delta, not the call delta. See, when you are talking about a call, its delta is a function of its probability of being executed. And when a call option would be executed, the value of the underlying is going up. We are interested in the opposite scenario, the scenario where the stock prices fall. All that information is given in the put's pricing and its delta. Therefore we multiply the put's delta with the portfolio value.

Hope this helps

Finance Junkie
Posts: 99
Joined: Sat Apr 07, 2012 10:24 am

### Re: Futures

Thanks for clearing the concept:)

bks.gtb
Good Student
Posts: 13
Joined: Sat Apr 07, 2012 7:43 pm

### Re: Futures

Hi,

Can you elaborate a bit more in detail about why it should be put delta and not call delta please. The explanation given by you is not clear for me.

Thanks.

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

### Re: Futures

When you want to "protect" your portfolio, you feel its value is going down. In case you are looking into the options market, you would choose to buy a put, so that the profit gained by your put would offset the loss made in your portfolio.
The number of put options required, would be a function of the put's delta.

Hope that helps

bks.gtb
Good Student
Posts: 13
Joined: Sat Apr 07, 2012 7:43 pm

### Re: Futures

thanks for the clarification.