This paper circulates around the core theme of What position should the company take? (2pts).On Nov. 1st, the level of S&P 500 is 1200 and the futures price is 1203. What is value of the position taken in (a) together with its essential aspects. It has been reviewed and purchased by the majority of students thus, this paper is rated 4.8 out of 5 points by the students. In addition to this, the price of this paper commences from £ 99. To get this paper written from the scratch, order this assignment now. 100% confidential, 100% plagiarism-free.
[Hedge Equity Portfolio] It is July 16. A company has a portfolio of stocks worth $12
million. The beta of the portfolio is 1.5. The company would like to use the CME December
futures contract on the S&P 500 to change the beta of the portfolio to 1.2 during the period
July 16 to November 16. The index futures price is currently 1,000 and each contract is on
$250 times the index.
1.
(a) What position should the company take? (2pts)
(b) On Nov. 1st, the level of S&P 500 is 1200 and the futures price is 1203. What is value of
the position taken in (a) ? (6pts)
(c) Suppose that the company changes its mind and decides to increase the beta of the
portfolio from 1.5 to 1.7. What position in futures contracts should it take? (2pts)
2. [Forward Valuation w/ No Income] A 1-year long forward contract on a non-dividend-
paying stock is entered into when the stock price is $40 and the risk-free rate of interest is
12% per annum with continuous compounding.
a)
What are the forward price and the initial value of the forward contract? (2pts)
Six months later, the price of the stock is $46 and the risk-free interest rate is still
12%. What are the forward price and the value of the forward contract? (2-2pts)
b)
3. [Future Valuation with Dividend Income] A stock index currently stands at 340. The
risk-free interest rate is 9% per annum (with continuous compounding) and the dividend
yield on the index is 5% per annum. What should the futures price for a 4-month contract be?
4. [Future Valuation with Storage Cost] The spot price of silver is $15 per ounce. The
storage costs are $0.24 per ounce per year payable quarterly in advance. Assuming that
interest rates are 10% per annum for all maturities, calculate the futures price of silver for
delivery in 9 months.
5. [Future Evaluation with Varying Interest Rate] An index is 1,200. The three-month
risk-free rate is 3% per annum and the dividend yield over the next three months is 1.2% per
annum. The six-month risk-free rate is 3.5% per annum and the dividend yield over the next
six months is 1% per annum. Estimate the futures price of the index for three-month and six-
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month contracts. All interest rates and dividend yields are continuously compounded.(Hint:
Match the risk-free rate with the dividend yield and corresponding maturity)
