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What are Strip hedges and Stack hedge?

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What are Strip hedges and Stack hedge?
posted Jul 10, 2017 by Niharika Singh

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A strip hedge happens when futures contracts over many maturities ranges are purchased to hedge the underlying cash positions. In other words strips of futures contracts are used. This normally happens when there is high liquidity for futures contracts over longer time horizons. There is no basis risk due to the strip hedge as the basis becomes locked and changes cannot affect the risk.

Stack hedge
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. This process then continues for futures delivery dates until each position maturity exposure is hedged. It normally happens when there is no adequate liquidity for the long term futures contract traded in the market. The following are the risks involved in stack hedging.

answer Jul 11, 2017 by Sagar Sharma