Register now or log in to join your professional community.
Financial derivatives - futures, forwards, and options contracts are used to hedge away the risks of the loss of value of the underlying assets in those contracts. Forwards and futures are mostly used for the commodities and foreign currencies. Structurally, forwards are like European options as they have the specific date on which they are to be exercised.
In my opinion, options are the best tools - for they are not mandatory to be exercised, opposite to the contracts. They also can have a set exercise date or no date at all (European and American options, respectively). They also allow a holder to make money off an asset in both cases - whether the asset's price is falling or rising (put and call options, respectively). Thus, the best way for an investor to have the most optimized, risk-free portfolio, is to make it of the assets (equities, for example) and their options. If the value of the assets in the future is somewhat unpredictable, it is best to keep the both put and call options. And I would choose the American ones. If the value rises above the strike price - I exercise the call option right when the difference between the strike price and the assets' current price is satisfying to me. If the asset's value is falling and gets below the strike - I exercise the put option. Again, when the difference seems to be worth it.
For the portfolio consisting of the commodities and forwards, there is a higher risk to lose money if the commodities' price goes below the exercise price stated in the contract if I am the buyer, and I do lose it too if the commodities' price goes above the exercise one - if I am the seller. I would be also bound to sell/buy by the forwards' terms.
Thus, in my opinion, the best hedging tool is options - American plain -vanilla and their exotic variations.
Do you need help in adding the right keywords to your CV? Let our CV writing experts help you.