- Forward and Futures Contracts 145
superior performance of the portfolio as compared to the market can be turned
into a profit despite a decline in the market. On the other hand, should the
market show some growth, the expected return on the hedged portfolio will be
reduced by comparison because the futures position will result in a loss.
It needs to be emphasized that this type of hedging with futures works only
on average. In particular, setting the beta coefficient to zero will not make the
investment risk-free.
Let us conclude this chapter with a surprising application of index futures.Example 6.5
In emerging markets short sales are rarely available. This was the case in Poland
in the late 1990’s. However, index futures were traded. Due to the fact that
one of the indices (WIG20) was composed of 20 stocks only, it was possible to
manufacture a short sale of any stock among those 20 by entering into a short
futures position on the index, combined with purchasing a suitable portfolio of
the remaining 19 stocks. With a larger number of stocks comprising the index
the transaction costs would have been too high to make such a construction
practicable.