3.4. The Futures Spread

In Chapter One we defined hedging as an activity designed to protect the financial position of an asset or liability by acquiring an opposite position with a derivative. A spread is another type of hedge. Instead of a derivative protecting an asset, this hedge is a derivative protecting a derivative. More specifically, a spread is a transaction in which a long position in one derivatives contract is paired with a short position in a similar derivatives contract.

When the derivatives employed are both futures contracts, the spread is called a futures spread, and it comes in three types. An intramarket spread consists of long and short futures contracts having the same underlying instrument but different expiration dates. It