Hedging Strategy Design

Overview

Design systematic hedging plans for existing positions, covering linear hedges (futures / ETFs) and nonlinear hedges (options). Output hedge ratios, cost estimates, and execution plans. Core principle: hedging does not eliminate risk; it exchanges unknown losses for known costs.

Core Concepts

1. Beta Hedging (Futures / ETFs)

Principle: hedge portfolio systematic risk (beta) with index futures or ETFs while preserving single-stock alpha.

Hedge ratio calculation:

# Minimum-variance hedge ratio
hedge_ratio = beta_portfolio * (portfolio_value / futures_value)

# Example: hold a 10 million RMB China A-share portfolio, beta = 1.2
# CSI 300 futures (IF) contract value = index level × 300
# IF level = 4000, contract value = 4000 × 300 = 1.2 million
# Required number of short contracts = 1.2 × (1000 / 120) = 10

# Beta estimation method
import numpy as np
# OLS regression: portfolio_returns = alpha + beta * index_returns + epsilon
beta = np.cov(portfolio_returns, index_returns)[0][1] / np.var(index_returns)

China A-share beta hedging instruments:

Instrument	Code	Contract Multiplier	Margin	Suitable Scale
IF (CSI 300 futures)	IF2403	300 RMB / point	~12%	> 5 million RMB
IC (CSI 500 futures)	IC2403	200 RMB / point	~14%	> 3 million RMB
IM (CSI 1000 futures)	IM2403	200 RMB / point	~15%	> 3 million RMB
CSI 300 ETF (510300)	510300.SH	,	Unlevered	Any size

Note: stock-index futures have basis (spot-futures spread). Shorting futures when they trade at a discount brings extra return (basis convergence), while premium pricing adds extra cost.

2. Option Hedging Strategies

Protective Put

Hold the underlying + buy a put option