Question

You have been assigned to implement a three-month hedge for a stock mutual fund portfolio that primarily invests in medium-sized companies. The mutual fund has a beta of 1.46 measured relative to the S&P Midcap 400, and the net asset value of the fund is $186 million.

a. Should you be long or short in the Midcap 400 futures contracts?

• Long

• Short

b. Assuming the Midcap 400 Index is at 649 and its futures contract size is 500 times the index, determine the appropriate number of contracts to use in designing your cross-hedge strategy. (Do not round intermediate calculations. Round your answer to the nearest whole number.)

2.Suppose the 6-month S&P 500 futures price is 1,537.77, while the cash price is 1,525.14. What is the implied difference between the risk-free interest rate and the dividend yield on the S&P 500?

3. Suppose you want to hedge a $550 million bond portfolio with a duration of 5.2 years using 10-year Treasury note futures with a duration of 6.7 years, a futures price of 108, and 9 months to expiration. The multiplier on Treasury note futures is $100,000. How many contracts do you buy or sell?

4. A call option currently sells for $7.75. It has a strike price of $85 and seven months to maturity. A put with the same strike and expiration date sells for $6.00. If the risk-free interest rate is 3.2 percent, what is the current stock price?

5. Suppose you buy one SPX call option contract with a strike of 1300. At maturity, the S&P 500 Index is at 1321. What is your net gain or loss if the premium you paid was $14?

6.What is the value of a call option if the underlying stock price is $78, the strike price is $80, the underlying stock volatility is 42 percent, and the risk-free rate is 5.5 percent? Assume the option has 110 days to expiration.

7.You are managing a pension fund with a value of $480 million and a beta of 0.90. You are concerned about a market decline and wish to hedge the portfolio. You have decided to use SPX calls. How many contracts do you need if the delta of the call option is 0.64 and the S&P Index is currently at 1250?

Answer 1

You have asked 7 unrelated questions in a single post. Further first question has multiple sub parts. I will address all the sub parts of the first question. Please post the balance questions one by one in a separate post.

You have been assigned to implement a three-month hedge for a stock mutual fund portfolio that primarily invests in medium-sized companies. The mutual fund has a beta of 1.46 measured relative to the S&P Midcap 400, and the net asset value of the fund is $186 million.

a. Should you be long or short in the Midcap 400 futures contracts?

The correct answer is "Short"

Since we are long in the cash market, we should take the opposite position in the derivatives market.

b. Assuming the Midcap 400 Index is at 649 and its futures contract size is 500 times the index, determine the appropriate number of contracts to use in designing your cross-hedge strategy. (Do not round intermediate calculations. Round your answer to the nearest whole number.)

Appropriate number of contracts = (Beta x NAV) / (Index x Futures contract size) = (1.46 x 186,000,000) / (649 x 500) = 837