Question

A portfolio manager desire to generate PKR20 million 120 days from now from a portfolio that is quite similar in composition on the S&P 100 index. He entered in a 120 day forward contract based on the index with a notional amount of PKR20 million and gets a quote of 740. If the index level at the settlement date is 757, calculate the amount the manager will pay or receive to settle the contract and also tell the position of portfolio manager

Answer 1

Notional Amount = PKR 20 million

Forward Quote based on index = 740

Index level on Settlement Date = 757

Change in the index = 757-740 = 17

% change = 17/740 = 2.297%

Since the portfolio managers wants to fix the return of PKR 20 million, he will taken a short position.

Thus, on the settlement date, amount the manager will pay = Notional Amount * % change in the index= PKR 20 Milion * 2.297% = PKR 459,400.

Since the portfolio manager took a short position and the value of the index appreciated by 2.30%, to hold his position, he will have to incur an outflow of PKR 459,400 or else he will have to face a loss of PKR 459,400.