Question

Imagine you are a portfolio manager who believes that growth stocks would do worse than the S&P 500 Index, but you are concerned that all stocks might go up or down during the next few weeks. Imagine that today’s date is March 16, 2018. September 2018 mini S&P futures are available at 2,752.01 (multiplied by $50). Vanguard Growth Index fund shares are available at $76.89 per share.

How many shares of Vanguard growth index fund can we long or short? Open.

1. Create a position combining one mini S&P futures contract with Vanguard Growth Index fund shares that would benefit you if your belief is ultimately correct.

2. Time has passed, and the date is August 10, 2018. The S&P futures contract is now trading at 2,559.36 and growth shares are at $69.20. How much money did your position make or lose?

Answer 1

As the belief is that growth shares would perform worse, Vanguard shares should be sold

No. of shares which should be sold (to ultimately be hedged against S&P) = 2752.01*50/76.89 = 1790 apx

No of shares of Vanguard which must be sold should be 1790 or any multiple thereof

1. The above sold shares must be hedged by purchasing S&P mini futures (One S&P futures for every 1790 shares)

This will not only hedge the position but also give profits in case the belief is correct

2. Loss on S&P mini futures = 50* (2752.01-2559.36) =$9632.5

Profit on Vanguard Shares (sold) = 1790* (76.89-69.20)= $13765.10

Net profit made by the position = $13765.10- $9632.50 = $4132.60