Hedging with futures: what exactly a short position in the contract locks in

Hedging with futures means opening a position in the contract opposite to the position already held in the portfolio, so that the gain on the contract offsets the loss on the asset and vice versa. You hold shares and fear a drawdown, so you sell a futures contract on the same stock or on the index. From that moment you stop earning on the upside for the hedged amount: you have not protected your return, you have swapped uncertainty about the price for certainty about a level, and you pay for it by giving up the move higher, by posting collateral against the position and by accepting daily margin cash flows.

What happens mechanically

A futures contract is an agreement to trade in the future at a price fixed now. A short position in it is an obligation to settle at that price, so it produces a positive financial result when the market falls. If the size of the short futures position is comparable to the value of the equity position, the combined value of the pair barely reacts to the price of the underlying asset: the loss on the stock is cancelled out by the gain on the contract.

What matters is that the share itself stays with you. You have not sold it, you have not left the shareholder register, you have not closed the long position — you have laid an opposite contract over it. That is exactly why a futures hedge is used where the asset cannot be sold or is expensive to sell: a large block, reluctance to book a trade, reluctance to lose a place in the list of equity holdings ahead of a corporate event.

Basis: why the hedge does not match exactly

The futures price and the price of the underlying asset are not equal. The difference between them — the basis — has a life of its own: it depends on the time to expiry, the interest rate, dividend expectations and demand for leverage. The hedge closes the price risk and opens basis risk: your result is now determined not by the market's move but by how the distance between the contract and the asset has changed.

Basis risk becomes noticeably larger when the hedge is placed not on the same stock but on the index. Protecting a portfolio of several issuers with an index futures contract works exactly to the extent that the portfolio resembles the index. The stronger the tilt towards a particular sector, the more often the pair will diverge: the index holds up while your stock falls for a reason of its own — for example, because of its financial results.

How many contracts to sell

The size of the hedge is calculated as the ratio of the value of the position being protected to the value of the contract, adjusted for the portfolio's sensitivity to the index if you are hedging with an index futures contract. The value of the contract is not its price in points: you need the specification, the lot size and the tick size of the particular instrument; see the instrument page — {{instrument:SBER}} — and the exchange's specification for the corresponding futures contract.

The procedure is simple. Step 1 — calculate the value of the position. Step 2 — take the value of the contract from the specification. Step 3 — divide and round; the remainder that is not covered by a whole number of contracts stays unhedged, and that is normal. Step 4 — set money aside for margin.

The money behind the position

Initial margin is blocked against a short futures position — a share of the contract's value that the exchange sets and may raise when volatility increases. Then the daily revaluation begins: variation margin is debited and credited every trading day. If the market goes up, the short futures position duly produces a loss, and it has to be paid in real cash — while the gain on the shares remains a paper gain until you sell them.

Contract expiry and rolling the position

A futures contract is finite. If the risk you are insuring against lasts longer than the contract, the position has to be rolled: you close the near-dated contract and open the next. Each roll is a trade at market prices, with costs and with a new basis, which means a hedge running for several quarters costs more than the first calculation suggests. It is better to tie the term of the hedge to an event rather than to the calendar: check the dates in the events calendar.

Dividends and the record date

A short futures position on a share does not deprive you of the dividend — the stock remains yours. But the expected payout is already built into the contract price, so "collecting the dividend and hedging against the drop at the record date" cannot be done for free: the market has priced it in advance. When planning a hedge around payouts, check the dividend calendar and the general payouts page — and remember that {{dividend_calendar|limit=5}} changes as announcements are made.

Taxes: an honest caveat

The result on futures and the result on shares are accounted for under the rules of Article 214.1 of the Tax Code, and whether a loss on the contract is netted against a gain on the stock depends on the type of underlying asset and on the category of the instrument. The site inserts the general rule as a reference note, 13%; this article does not contain a precise breakdown of netting for your particular structure — that is a question for the broker's report and for a tax adviser, not for a general article.

When a futures hedge is not needed

If the position can simply be sold and doing so costs nothing — sell it. A hedge is justified where exiting the asset costs more than carrying the contract: tax consequences, the size of the block, a thin market, a short risk horizon. For a long-term reduction in risk it is cheaper to change the composition of the portfolio — shifting weight towards OFZ bonds or funds — than to keep a permanent short leg with daily margin. Definitions of related concepts are in the glossary and in the entry on the hedge.