![]() ![]() If there are long maturity hedges then it is important to tail the futures position.Margin calls on the futures can trigger panic in the market.Accounting regulations impact the profits and losses that are generated from the hedging methods and hence need to be taken into consideration.The following points are also to be noted Stock futures barely budged Tuesday morning, as the Dow Jones Industrial Average comes off a six-day winning streak. A short stack position generates negative cashflows under these conditions. If the market is in backwardation the stack strategy creates positive cashflows at roll-over dates.The possibility of conflicting with position limits is high due to the high hedging volumes. Search 170,000+ stock ticker symbols from 70 exchanges supported by the marketstack stock market data REST API service.There are high transaction costs due to this type of hedging due to more contracts being required.Liquidity is higher as instruments with short maturity are being used.Basis risk is locked only for the initial contracts and the future basis exposure is locked.The following are the risks involved in stack hedging. It normally happens when there is no adequate liquidity for the long term futures contract traded in the market. ![]() This process then continues for futures delivery dates until each position maturity exposure is hedged. This type of hedging involves purchasing futures contracts for a nearby delivery date and on that date rolling the position forward by purchasing a fewer number of contracts. There is no basis risk due to the strip hedge as the basis becomes locked and changes cannot affect the risk. This normally happens when there is high liquidity for futures contracts over longer time horizons. In other words strips of futures contracts are used.
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