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Archive for March, 2011

Futures trading can be used for two main purposes; Speculation and Hedging. While most retail futures traders get involved in futures trading for the purpose of leveraged speculation, it cannot be forgotten that the true purpose of futures contracts is for the purpose of hedging.

Hedging using futures is technique most professional money managers use for decades. However, there is one main problem with hedging using futures and that is the fact that the settlement price of futures contracts isnt the actual spot price of their underlying asset. Thats right. In other words, the price of the underlying asset used to determine the worth of each futures contracts isnt the actual price of the underlying asset but a price derived from the actual price known as the Settlement Price. The problem with settlement price is that it can vary significantly from the actual price of the underlying asset and this difference in pricing may cause problems with hedging precisely using futures contracts.

Settlement price is determined at the end of each trading day or trading period by various methods, including price averaging across a certain period, and reflects the future price expectation of the underlying asset at various expiration months. This is why futures contracts of different months have a different price even though they are all based on the same underlying asset. In fact, some futures contracts may end up lower on days where the spot price of the underlying asset actually went up!

As a result of this tracking error between the settlement price and the actual spot price, it is nearly impossible to hedge a position to delta neutrality completely using futures.

This is also why options are becoming the new favorite hedging instrument of professional portfolio managers and are used much more commonly in stock hedging than their single stock futures counterpart.

Options base their price on the actual price of the underlying asset itself instead of a derived price of the underlying asset. As such, options are capable of the precise level of hedging that futures are not quite capable of.

Traditionally, futures contracts have been used for price protection between buyers and sellers of a particular commodity. By entering into a contract to trade the commodity at a specific price right now, buyers are protected against price hikes and sellers are protected against price drops. This is the hedging function that exchange traded futures still perform but the fact that the settlement price of a futures contract only converges with the spot price of the actual underlying asset close to or on expiration date itself, it is hard to use futures for precise short term hedging that may last only days and comes nowhere close to the expiration date.

Derivatives instruments such as futures and options are originally designed as hedging tools. As the demand for highly precise hedging over very short periods of time increases, futures are slowly becoming less popular compared to options in terms of non-commodity hedging.

Learn more about options trading at Optiontradingpedia.com and futures trading at Futurestradingpedia.com .

Are you apprehensive about interest rate movements? If yes, hedge yourself against adverse developments in rates and thereby you can control your costs with an effective instrument – Interest Rate Futures (IRF). These short term contracts are based on underlying assets which are usually interest bearing securities.

Various types of IRFs are normally exchange traded and few examples of IRFs are 13 week Treasury Bills, 3 month Eurodollars, one month Fed funds etc.

•  Treasury bills are normally regarded risk free as they are backed by the United States government, however to hedge against interest rate movements on these securities T-bill futures are used and they are usually available in quarterly contracts.

•  Eurodollars, unrelated to Euro, are deposits in banks outside the United States which are denominated in U.S. Dollars. Such deposits do not fall under the jurisdiction of the Federal Reserve. Similarly Euroyen are deposits in Japanese Yen held outside Japan.

•  Fed Funds are mandatory reserves with Federal Reserve contributed by all commercial banks.

Hedging with Interest Rate Futures

The most common practice in Interest rate futures market to hedge positions bearing interest rate risk is to enter into an offsetting futures contract. One can also hedge forward borrowing rates using IRFs. Investors normally enter into a buy or sell transaction in the futures market today, which they transact in the cash market in future.

The size of interest rate future contracts depends on exchanges and the type of contracts being traded. Price of short term interest rate contracts are usually based on index value (set at 100) less the interest rate. Bond based contracts derive their price from the yield on notional security.

IRFs yield multiple benefits to various players. These instruments enable Primary Dealers to manage their interest rate risk and also enhance earning capacity. IRFs further also aid in reducing transaction costs, eliminate credit and settlement risks. Banks are benefited with IRFs in managing their repricing risk, yield curve risk and basis risk. Capital adequacy ratio can also be improved with IRFs as hedged assets require lesser capital allocation. Corporates can improve their credit ratings as hedging enhances their ‘interest coverage’ and ‘debt-service coverage’ ratios.

Though, interest rate futures are extremely beneficial in the current times against interest rate movements, one must be fully aware of the various risks and complications involved in its usage.

The VW is car manufacturing company that had paid more attention on the performance from the car than on the comforts that it provided to its owner. This made things harder to the VW when the competition got harder. It then started making big changes within the interiors and also gave excellent sound system to the people. Though it was good, there were many incidents when the change of stereos was inevitable. There could be a problem within the performance from the head unit or the owner would like to stay updated with the latest technological developments within the head unit. Below are a few instructions on how you can remove a jetta oem head unit.

There are some basic things that would help out with fixing the problem of removing the head unit from the car. The tools which are needed are the special tools for removing the head unit that is provided by the VW themselves and a wrench which is ten millimetre in size. The steps and instructions given within the following paragraphs are moderately difficult to follow.

The first within the other steps of removing the battery is a precautionary step of disconnecting the battery. The hood of car is opened. Then, the batterys negative end is removed from the port; with the help from the small wrench that you posses. This is necessarily done to prevent the electrical shock that it may produce. This terminal is connected to the frame from the car.

The other end of this terminal is also disconnected. This wire is then laid away from the battery. This is done to ensure safe steps within the removal from the battery.

The tools for this purpose are manufactured by the car makers themselves and are generally available in all leading shops that sell spare parts for automobiles. This is purchased. With the help of this tool, the head unit can be easily driven out from the slit with no effort at all. Insert the tool within the openings that present around the head unit. Push it gently, till the tool clicks in its position.

Once it is placed within the proper position, push it away from the head unit, and it will be seen that the head unit is free to be removed. This is because the tool has removed all the clips that hold the head unit. Once it is free, pull it out slightly and remove the head unit to a distance that is sufficient for removing the wires

Once the wires are all disconnected the head unit is easy to remove fully. The removal from the wires that connect the antenna, power from battery, and connections to the speakers is easy to remove in any order. This can be done either with hands or using a tool

After the above tips on how you can remove a jetta oem head unit are followed, the negative terminal within the battery from the car may be reconnected using wrench. This is done when you have no ideas of fixing another radio to be used.