Reading 38: Risk Management Applications of Forward and Fu Create, against, selling, position

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CFA Institute Area 8-11, 13: Asset Valuation
Session 13: Risk Management Applications of Derivatives
Reading 38: Risk Management Applications of Forward and Futures Strategies
LOS c: Create synthetic cash by selling stock index futures against a long stock position.

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A portfolio holds $20 million of its assets in an index fund that mimics the return of the Dow Jones Industrial Average (DJIA). The dividend yield on the DJIA index is 2.8 percent. The manager of the portfolio would like to synthetically convert half of the position to cash for a one month period. The futures contract on the DJIA that expires in a month is priced at 14520.01. It has a multiplier equal to $10. The risk-free rate is 3.85 percent. The number of contracts the fund needs to use is closest to:

A) 72.

B) 66.

C) 62.

D) 69.

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Answer and Explanation

略

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