Question

A fund manager expects to receive a cash inflow of R50 000 000 in three months. She wishes to use futures contracts to take a R30 000 000 synthetic position in shares and a R20 000 000 in bonds today. The share would have a beta of 1.15 and the bond a modified duration of 6.25. A share index futures contract with a beta of 0.90 is priced at R300 000 and a bond futures contract with a modified duration of 7.50 is priced at R105 000.

Indicate whether the fund manager should sell (short) or buy (long) these share index futures.

the above number of share index futures.

Answer 1

Since the Fund Manager wishes to invest R30000000 in Shares and R20000000 in bonds, he will be taking a long position in Futures.

Amount to be invest d in share Index Futures = Amount wishing to invest in shares * Beta of shares / Beta of Index Future

= 30000000 * 1.15 / 0.90

= 38333333.333

No. of share Index futures to be bought = Amount to be invest d in Index Futures/ Price of each share index futures

= 38333333.333/ 300000

= 127.78 Share Index Future contracts or ~128 Share Index Future contracts