Question

Investment Manager expects to invest in Australian equities in six months but is concerned that they...

Investment Manager expects to invest in Australian equities in six months but is concerned that they may appreciate sharply in the near future. Investment Manager can hedge by:

Select one:

a. buying futures contracts based on the S&P/ASX 50 index now and closing this position in about six months with a sell order.

b. buying futures contracts based on the S&P/ASX 50 index now and receiving delivery of the equities in six months

c. None of the given answers

d. selling futures contracts based on the S&P/ASX 50 index now and closing this position in about six months with a buy order.

e. selling futures contracts based on the S&P/ASX 50 index now and receiving delivery of the equities in six months.

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Answer #1

Since the Investment Manager expects to invest in Australian Equities in 6 months, he is concerned that the prices may appreciate in the near future before the investment is made.
To hedge against the price rise he will buy 6 months Future contracts today on S&P/ASX50 index. Since his purpose is investment he will receive delivery of the equities in six months. In this way he will be able to invest at the future contracts price prevailing today.

Option b. is correct.

Option a. is incorrect since he will take delivery of the equities because he expects to invest in 6 months.
Option c. is incorrect since Option b. is correct.
Option d. and Option e. are incorrect since to protect against the price rise he will buy futures contracts instead of selling them.

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