Identifier: C3T4L1 · Revision: 2026-10-26 · Classification: domestic

Decision and objectives

Size an index hedge from portfolio value and beta. The decision record must connect the exposure, cash dates and implementable contract, rather than stop at a favorable price forecast.

By the end, you can size an index hedge from portfolio value and beta; quantify rounding and beta-estimation residuals; fund a short hedge through a rising market.

Prerequisite: C3T3L4; completed Classes 1 and 2 and the Stock Market School foundation or Forex School foundation. All cases below are hypothetical; their prices, costs, rates, dates, contractual assumptions and collateral amounts are teaching inputs, not current offers.

Mechanics

Beta estimates how much a portfolio's return changes with an index return over a specified sample. It is a local historical sensitivity, not an ownership fraction or a permanent forecast. Short index futures reduce positive market exposure while leaving stock selection, dividends, tracking differences and issuer risk. A beta-neutral target differs from a partial hedge selected to retain market exposure.

Price and return drivers

Target short contracts = portfolio value × (current beta − target beta)/(futures price × multiplier). Round to an executable integer, then calculate residual beta exposure in currency = portfolio value × current beta − short contracts × futures notional. This approximation assumes small comparable moves and stable beta; it is not exact replication.

Worked case

Hypothetical portfolio TRY 2,000,000, beta 1.2, target beta zero; future 10,000 points and TRY 10 multiplier. Target = 2,000,000 × 1.2/100,000 = 24 shorts. A 5% index decline with the portfolio following beta gives portfolio loss TRY 120,000. Futures fall 500 points and gain 24 × 10 × 500 = TRY 120,000. Supplied round-trip execution TRY 2,400 and collateral funding TRY 3,600 leave net hedge package −TRY 6,000 before tax, relative to unchanged starting portfolio value. Initial hypothetical margin TRY 15,000 each ties up TRY 360,000, not an expense.

Adverse case

If actual portfolio beta during the fall is 1.5, the portfolio loses TRY 150,000 while futures still gain TRY 120,000: residual loss TRY 30,000 before costs. A 5% index rise instead creates a TRY 120,000 futures debit even though the portfolio may gain; initial cash plus the debit needs at least TRY 480,000 before margin changes and fees. Asset appreciation cannot pay a call without liquidation or credit.

Practical use

Use the right index, portfolio valuation time and futures maturity. Check live series, depth and broker margin, none of which is established by a specification page. Maintain a daily cash plan and re-estimate after substantial portfolio changes. Include dividend mismatch, trading fees, financing, rebalance cost and investor-specific tax.

Reconcile the confirmation, position register and cash statement separately. Costs include the quoted bid/ask spread, brokerage and clearing charges, collateral or principal financing, currency conversion, custody where relevant, and exit or termination charges. A mark is not a fill. Any amount explicitly excluded below remains outside the reported result. Tax is excluded from these teaching cases: an actual comparison requires income year, investor residence and individual/corporate status, contract and acquisition dates, settlement form and effective law. The GIB guide, checked 2026-10-26, covers 2025 individual investment income, so its publication date alone does not settle a 2026 derivative liability.

Decision boundaries

Use the hedge for a stated market-risk budget, not a guarantee against all portfolio losses. If beta is unstable or concentrated issuer exposure dominates, a smaller hedge or reduced cash equity position may better fit the objective. Decline the 24-contract implementation if its cash path cannot be funded.

Practice and references

Exercise: portfolio TRY 1,500,000, beta 0.9, future notional TRY 100,000. Calculate target contracts and both integer residuals. Solution: target = 1,500,000 × 0.9 / 100,000 = 13.5 short contracts. With 13, residual exposure = 1,350,000 − 1,300,000 = TRY 50,000 long; with 14 it is TRY 50,000 short. A 4% index move gives about TRY 2,000 residual in the corresponding direction before basis, beta error and costs.

Takeaway: Fund a short hedge through a rising market using the actual cash schedule, with every excluded cost and remaining exposure stated.

Reference card: viop-future. Formula: Beta-adjusted futures hedge count. Glossary: Beta, Hedge ratio. Next lesson: C3T4L2. Topic test.

Sources and verification date (2026-10-26):

Related product cards: viop-index-future.

Shared reference guide