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Hedging with Dow futures

Agriculture.com Staff 04/14/2006 @ 8:22am

With the development of stock index futures over the last decade, individual investors have tools in which they can hedge their stock portfolio. For this perspective, we will focus on the Dow Jones futures contract. It is traded at the Board of Trade and has two contract sizes. The large Dow trades at a value of $10 per tick. The Mini-Dow, which probably suits smaller investors, trades at $5 per tick.

At $5 per tick, the Mini-Dow futures at 11,000 has a dollar value of $55,000. Therefore, if you want to hedge a portfolio of blue chip stocks and the value is near $50,000, one mini-futures would provide coverage. If the value of your portfolio is $100,000, then you would use either one large Dow or the flexibility of two Minis.

The June, Dow futures have been in an uptrend since early January with prices bottoming on January 20 at 10,750 and rallying up to 11,410. Recently, the market has begun to decline. If energy prices stay high, it may eventually weaken the economy, which could mean a further slide in stock prices.

Knowing you have the ability to hedge could provide valuable risk management for those who are invested in stocks. This may be especially useful for older investors who are in or near retirement, who may still want to participate in the stock market, yet do not want to get caught in a sell-off.

If you have questions or comments, please contact Top Farmer at 1-800-TOP-FARM, ext. 129.

With the development of stock index futures over the last decade, individual investors have tools in which they can hedge their stock portfolio. For this perspective, we will focus on the Dow Jones futures contract. It is traded at the Board of Trade and has two contract sizes. The large Dow trades at a value of $10 per tick. The Mini-Dow, which probably suits smaller investors, trades at $5 per tick.

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