Spot Futures Hedging is a risk management strategy where an investor simultaneously takes opposing positions in the spot (cash) market and the futures market for a specific cryptocurrency. Its purpose is to mitigate price volatility risk for an existing or anticipated spot position, protecting against adverse price movements. This neutralizes directional exposure.
Mechanism
If an institution holds a long spot position in Bitcoin, it might sell an equivalent value of Bitcoin futures contracts. A decline in the spot price would be offset by a gain in the short futures position, effectively neutralizing the market exposure. Conversely, an anticipated spot purchase could be hedged by buying futures contracts.
Methodology
The methodology aims to isolate and reduce directional price risk by offsetting movements in the underlying spot asset with corresponding futures contract adjustments. This provides a robust framework for managing market exposure, particularly for large institutional portfolios, allowing for more predictable financial outcomes in volatile crypto markets. This ensures capital preservation.
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