Question
In: Accounting
40. Pigeon Ltd holds a well-diversified portfolio of shares with a current market value on 1...
40. Pigeon Ltd holds a well-diversified portfolio of shares with a current market value on 1 May 2014 of $900 000. On this date Pigeon Ltd decides to hedge the portfolio by taking a sell position in ten SPI futures units. The All Ordinaries SPI is 2980 on 1 May 2014. A unit contract in SPI futures is priced based on All Ordinaries SPI and a price of $25. The futures broker requires a deposit of $1500. On 30 June the All Ordinaries SPI has fallen to 2570 and the value of the company's share portfolio has fallen to $790 000. What is the gain or loss on the futures contract and the net gain or loss after hedging?
Solutions
Expert Solution
| On May 1 2014 Pigeon ltd holds sells position ($10*25*2980) | $745000 |
| On June 30 SPI values at 2570 ($10*25*2570) | $642500 |
| Gain or loss on future contract (A) | $102500 |
| Value of Portfolio on May 1 | $900000 |
| Value of Portfolio on 30 June | $790000 |
| Loss in value of portfolio (B) | $110000 |
| Net loss after hedging (A-B) | ($7500) |
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