Question

State whether you agree or disagree with the following statement. Explain why.

Given: A mutual fund invests in equities. The fund manager expects a large contribution by an institutional investor. He also expects stock prices to increase significantly before the money is received and could be invested.

Statement: The manager should consider selling (as opposed to buying) stock index futures to benefit from the anticipated appreciation in the stock prices.

(Note: The manager is only considering buying or selling stock index futures. He is not considering other ways to hedge the portfolio.)

Answer 1

I do not agree with this statement because if he is assuming that stock price are going to increase in future then he should not have shorted the stock index because shorting of the stock index will mean that he is betting for the down side of the stock index and if the stock index is going to go up, then he can be suffering huge losses in his portfolio and even if the money is not received,she should only be considering buying of the stock index in order to gain from short term volatility on the upside because he is expecting a upward movement and he cannot short the index in order to gain from such moment.

I do not agree with mutual fund manager taking position on the downside by shorting the index so he should have been buying the features of the index that would have helped him in order to gain from the upward movement of the index, so it can be said that I do not agree with the manager shorting the index because it will be leading to losses.

Generally this future positions will be taken through a small capital and they can be used for benefiting up on a larger move so manager could have bought the index futures.