Answer:
Assume that a month later the equity portfolio has a market value of $20,000,000 and the stock index future is priced at 1150 with a multiplier of 250. Calculate the profit on the equity position.
Calculate the overall profit.
$1,550,000
Explanation:
Assume that a month later the equity portfolio has a market value of $20,000,000 and the stock index future is priced at 1150 with a multiplier of 250. Calculate the profit on the equity position.
Calculate the overall profit.
The manager should be short on the stock index futures because the position on the equity portfolio is long.
Number of contracts required to hedge
= [$20,500,000/(1250*250)] * 1.25 = 82 contracts
Profit on the equity portfolio
= $20,000,000 - $20,500,000 = -$500,000
Profit on the stock index future
= [(1250)(250) – (1150)(250)] x 82 = $2,050,000
Overall profit
= $2,050,000 - $500,000
= $1,550,000
therefore, the overall profit is $1,550,000
