Module 4 of 5 in Derivatives and advanced market concepts
Hedging, arbitrage and basis
Using derivatives to reduce risk, the costs of hedging, arbitrage between cash and futures, basis and convergence at expiry.
3 lessons in this module. Progress is saved in your browser as you go.
Derivatives exist mainly to move risk from people who do not want it to people who are paid to take it. This module explains hedging with futures and options, what a hedge costs, and how arbitrage keeps futures prices close to the underlying.
By the end of this module you should be able to
- Explain how futures and options can hedge a portfolio and what the hedge costs.
- Explain cash-futures arbitrage, the cost of carry, basis and convergence at expiry.
Lessons in order
Module test
10 questions, chosen at random from a bank of 30 questions and balanced across this module's learning goals and difficulty levels. Every question comes with an explanation. You need 80% to pass, and you can retake it as often as you like with a fresh set of questions.
This module builds on
- The risks of buying and selling options: Hedging with puts means being an option buyer, with the costs explained there.
- Beta and market risk: Beta is used to size the hedge.
- Futures margin and mark-to-market: This lesson explains how the futures prices traded there are linked to the spot price.
- Compounding and CAGR: The cost of carry uses interest over time.