Present three main "lessons" that describe how futures and spot prices behave, relative to each other....

Present three main "lessons" that describe how futures and spot prices behave, relative to each other. How do these lessons affect the minimum risk hedge ratio?

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Expert Solution

Future and spot prices will be behaving -

A. There can be trading of securities at the premium in the future market if the expectation is of favourable in nature in future and hence it will be a trading at a premium because spot prices will be lower than the future price

B. There can also be trading of securities as a discount in relation to the current prices so it will be set to be trading at a discount in the future . this discount will be representing the expectation of investors for unfavourable outcome in future

C. This can also be representing up similar spot as well as future prices for a particular security and it will be reflecting that the expectation is is that the conditions are going to remain the same

This will be effective the minimum hedge ratio as It will have to build up position of having through differential between the spot and the future rate and we will have to position him accordingly after ascertainment of the discount and the premium in the markets.

jeff jeffy answered 1 year ago

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