SYNTHETIC HEDGE

1
SYNTHETIC HEDGE ( A Risk Free Product )
2
INTRODUCTION

• Hedging is normally looked at as a tool to
  contain risk in the trading mechanism. The
  popular set of strategies used in the market as
  hedge strategies aim at containing risk by
  spending or foregoing some part of possible
  profit.
• However, The Futures and options segment of the
  market, with all its versatility offers much
  more to a smarter decision maker. It provides you
  with strategies which can be used as a money
  making mechanism and prove to be regular income
  generator at a reasonably higher rate of return
  over the fixed income product.
• One such strategy from the pack is synthetic
  hedge a safe, systematic way of generating a
  reasonable regular return on the capital.

3
THE PRODUCT

• Synthetic hedge aims at capturing advantage of
  rate discrepancies prevailing in the market in
  different contracts by taking a position in
  different contracts of the same underlying as a
  combination of contracts to earn arbitrage profit
  arising out of such differences or discrepancies.
  The following example will explain the product.
• e.g.
• Buy in stock futures _at_ Rs. 167
• Sell in 160 Call _at_ Rs. 19.7
• Buy in 160 Put _at_ 10.5
• Now the eventuality table

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EVENTUALITY TABLE
5
PAY OFF CHART
6
TRADE EXPLANATION

At an average margin level of 40 , the
investment per unit into the strategy is at Rs.
70 ( 167 .40) approx. As Pay-off chart
suggests, profit will remain same at Rs.2.2
across all price Neither it makes more profit at
Rs.200 future price nor it makes any loss at
Rs.110. The return on investment stands at 3.14
( 2.20 100/70) on the investment without
assuming any risk of market direction or any kind
of fluctuations. Likewise there can be many
variants of synthetic hedge strategies which
generate similar kind of returns on no risk
basis.
7
ADVANTAGES

• A system Generated Risk Free Product
• Liquidity
• ( The investment remains liquid at any point
  of time )
• Capital growth
• ( The investment grows at a reasonably
  higher rate than the average growth of equity
  markets )
• Protection
• ( Protection and growth of real wealth as it
  beats inflation )
• Transparent
• ( The entire transaction is carried out in
  clients name in a very transparent manner)

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