How to hedge risk with futures contracts?

Suppose that you are a portfolio manager and you expect that some investors of your fund will cash out their investments in the next three months. How would you use S%26amp;P 500 futures to hedge the risk of changing stock prices?|||i would use options instead of futures for better hedge. since you want to hedge changing stock prices, i suppose you already have a long position in stocks. to hedge, i'd buy deep in the money put option that expires in 3 months time. if the stock price falls, i would cash in the put, if stock price rises but still below exercise price, i could still cash in the put, and if stock price rises well above exercise price, i would leave the put unexercised.





if you however insist on using futures, you could sell S%26amp;P 500 futures with a certain ratio (no of stocks bought/no of futures sold) that you can derive from GARCH(1,1) hedge (a modeling of futures and spot prices, conditional hedge ratio=covariance of futures and spot hedge / futures hedge, use MATLAB). if you're not familiar with GARCH (1,1) hedge you could do a naive hedge (selling 1 futures for every stock bought) but of course it's not a good hedge.|||Buy put option for the period and amount|||I would use put options on the relevant stocks (or indices). For example, If I own Ternium S.A. (TX:$35.93), I could buy a put option for Feb 08 for 5.10 (strike $40, sale value $34.9). So, I might lose a dollar or so, but not too much else. I'm sure a similar thing applies for S%26amp;P futures.





The other approach would be to cash out now and move the funds into a short term cash equivalent. Of course, you lose the potential gains if the stock move up in the interim.