Question

The S&P 500 Index is currently at 1,800. You manage a $9m indexed equity portfolio. The S&P 500 futures contract has a multiplier of $250.

If you are temporarily bearish on the stock market, how many contracts should you sell to fully eliminate your exposure over the next six months?

If T-bills pay 2% per six months and the semiannual dividend yield is 1%, what is the parity value of the futures price?

Show that if the contract is fairly priced, the total risk-free proceeds on the hedged strategy in the first part of this question provide a return equal to the T-bill rate.

Answer #1

Value of Portfolio- $9 Millions or $ 90 Lacs

S&P Future contract Multiplier- $250

1. Number of contracts to be sold to completely eliminate downside risk- (90 Lacs/250)= 36000 contracts.

2. Parity Value of Future Price= Spot price*(1+ Risk Free Interest Rate-Income Yield)

Spot price= $1800

Risk Free rate for 6 month= 2%

Dividend yield for 6 month is 1% (semi annual)

Thus, Parity value= 1800*(1+.02-.01)= $1818

PS- This can be calculated by following formula as well

F= S*e^{(r-y)t where,}

^{e= 2.71828}

^{r= Risk Free rate}

^{y- Income yield}

^{t= time (in this case assume time to be 1 as both rates are
given for 6 months and future rate is to be calculated for 6
month}

The S&P 500 Index is currently at 2,000. You manage a $15
million indexed equity portfolio. The S&P 500 futures contract
has a multiplier of $50.
a. If you are temporarily bearish on the stock market, how many
contracts should you sell to fully eliminate your exposure over the
next six months?
b. If T-bills pay 1.8% per six months and the semiannual
dividend yield is 1.6%, what is the parity value of the futures
price? (Do not round intermediate...

2. You are a corporate treasurer who will purchase $1m of bonds
for the sinking fund in 3 months. You believe rates soon will fall
and would like to repurchase the company's sinking fund bonds,
which currently are selling below par, in advance of requirements.
Unfortunately, you must obtain approval from the board of directors
for such a purchase, and this action can take up to 2 months. What
action can you take in the futures market to hedge any...

An investor owns a $250,000 equity portfolio with a beta of
1.25. The S&P 500 index is currently 2,000, the risk-free
interest rate is 4% per annum, and the dividend yield on the index
is 2% per annum.
(a) If the index increases to 2,200 over the next six months,
what is the expected percentage return on the equity portfolio?
(b) Futures contracts (for 100 times the index) are currently
priced at 2,100. How could the investor hedge the portfolio...

Suppose the S&P 500 currently has a level of 960. One
contract of S&P 500 index futures has a size of $250× S&P
500 index. You wish to hedge an $800,000-portfolio that has a beta
of 1.2.
(A)In order to hedge the risk of your portfolio, should you long
the futures or short the futures? Why?
(B)How many S&P 500 futures contracts should you trade to
hedge your portfolio?

Suppose the S&P 500 index futures price is currently 1000.
One contract of S&P 500 index futures has a size of $250×
S&P 500 index. You wish to purchase four contracts of futures
on margin. Suppose that the initial margin is 10%. Your position is
marked to market daily. The interest earnings from the margin
account can be ignored.
(A) What is the notional value of your position?
(B) What is the dollar amount of initial margin?
(C) What is...

On January 1, you sell one April S&P 500 Index futures
contract at a futures price of 2,300. If the April futures price is
2,400 on February 1, your profit would be __________ if you close
your position. (The contract multiplier is 250.)
A)
$12,500 B) -$25,000 C) $25,000 D) -$12,500
The current level of the S&P 500 index is 2,350. The
dividend yield on the S&P 500 is 2%. The risk-free interest
rate is 5%with continuous compounding. The futures price quote for
a contract on...

You have the following market data.
The S&P 500 market index currently is 94.87.
The annualized, continuously compounded dividend yield on this
index is 3.71%.
The futures contract on this index has an index multiplier of
100.
The annualized, continuously compounded risk-free rate is
3.41%.
The index futures contract that expires in 5 months has a
futures price of 80.32.
What is the total net profit if you execute the
arbitrage strategy with one futures contract?
Do not round values...

Suppose you manage a portfolio with a current market value of
$58,715,000. You and your analyst team actively manage a long/short
equity fund, which is benchmarking the S&P 500. Over the past
three years your fund exhibits an annual continuously compounded
return of 13.27%. Over the same period of time the S&P 500
returned an average annual continuously compounded return of
14.17%. You and your team estimate the beta of the portfolio over
the same time period using daily returns...

The S&P 500 is currently valued at $2,700 and the 1-year
Mini Future contract has a price of $2,767. The risk free rate is
2.5% per annum and the S&P 500 dividend yield is 0.5% per
annum. You are managing a portfolio that is worth $10 million and
has a beta of 1.75. (Remember E-mini S&P 500 Future contracts
are 50 x price)
a. What position in futures contracts on the S&P 500 is
necessary to hedge the portfolio?
b....

The S&P 500 is currently valued at $2,700 and the 1-year
Mini Future contract has a price of $2,767. The risk free rate is
2.5% per annum and the S&P 500 dividend yield is 0.5% per
annum. You are managing a portfolio that is worth $10 million and
has a beta of 1.75. (Remember Emini S&P 500 Future contracts
are 50 x price) What position in futures contracts on the S&P
500 is necessary to hedge the portfolio so our...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 8 minutes ago

asked 13 minutes ago

asked 17 minutes ago

asked 27 minutes ago

asked 27 minutes ago

asked 32 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago