clearlycanadian

An investor has a cash position currently invested in T-Bills but would like to "equitize" it by using S&P futures contracts. Which of the following trades will create the desired synthetic equity position?

A) Selling the T-Bills and buying S&P 500 futures contracts.

B) Buying S&P 500 futures contracts.

C) Selling S&P 500 futures contracts short.

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The trader can buy stock index futures and hold them in conjunction with T-Bills to mimic a stock portfolio. So we have:

Synthetic stock portfolio = T-Bills + stock index futures.

clearlycanadian

A manager has a position in Treasury bills worth $175 million with a yield of 2%. For the next 6 months, the manager wishes to have a synthetic equity position approximately equal to this value. The manager chooses S&P 500 index futures, which has a dividend yield of 2%. The futures price is 1,050 and the multiplier is $250. How many contracts will this take?

A) 655 contracts.

B) 421 contracts.

C) 673 contracts.

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Number of contracts = 673.3 = $175,000,000 × (1.02)0.5/(1050 × 250)

clearlycanadian

When using stock index futures contracts and cash to create a synthetic stock index, the larger the index multiplier:

A) the fewer the number of needed contracts.

B) there is no such thing as an index multiplier.

C) the greater the number of needed contracts.

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The formula is:

Number of contractsUnrounded = (V × (1 + risk free rate)T) / (futures price × multiplier)

As the multiplier increases, the number of needed contracts declines.

clearlycanadian

To synthetically create the risk/return profile of an underlying common equity security:

A) Buy the corresponding futures contract and invest in a T-bill.

B) Sell short the corresponding futures contract and invest in a T-bill.

C) Buy the corresponding futures contract and borrow at the risk-free rate.

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Futures + Cash = Security, therefore, buy the corresponding futures contract and invest in a T-bill.

clearlycanadian

To create a synthetic cash position:

A) sell short the common equity, buy the corresponding futures contract, invest in a T-bill.

B) buy the common equity and sell short the corresponding futures contract.

C) buy the common equity, sell short the corresponding futures contract, invest in a T-bill.

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Security – Futures = Cash, therefore, buy the common equity and sell short the corresponding futures contract.

clearlycanadian

Which of the following statements about portfolio hedging is least accurate?

A) For a fixed portfolio insurance horizon, using put options generally requires less rebalancing and monitoring than with the use of futures contracts.

B) Futures contracts have a symmetrical payoff profile.

C) To synthetically create the risk/return profile of an underlying common equity security, buy the corresponding futures contract, sell the common short, and invest in a T-bill.

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To synthetically create the risk/return profile of an underlying common equity security, buy the corresponding futures contract and invest in a T-bill.

clearlycanadian

An investment of $240,000,000 in T-bills earning 3 percent is combined with 886 stock index futures that have a price of 1,100 and a multiplier of 250. In three months, when the futures mature and the index value is 1,120, what will be the value of the position at that time?

A) $243,650,000.

B) $248,080,000.

C) $246,210,097.

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Payoff of futures plus T-bill = 886 × $250 × (1,120 − 1,100) + $240,000,000 × 1.03 0.25
Payoff of futures plus T-bill = $246,210,097

clearlycanadian

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%. 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%. The number of contracts the fund needs to use is closest to:

A) 66.

B) 69.

C) 72.

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The negative sign indicates the need to take a short position.

clearlycanadian

A manager wants to synthetically convert to cash $45 million of a diversified stock portfolio for three months. The manager will use the CME E-mini S&P stock index futures contract, which has a multiplier equal to $50, and the price of the three month contract is 1610.50. The dividend yield on the portfolio is 2.4%. The risk-free rate is 4.04%. The number of contracts the fund needs to use is closest to:

A) 588.

B) 564.

C) 532.

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The negative sign indicates the need to take a short position.

clearlycanadian

A manager wants to synthetically convert to cash $12 million of a diversified stock portfolio for three months. The manager will use the CME E-mini S&P stock index futures contract, which has a multiplier equal to $50, and the price of the three month contract is 1598.80. The dividend yield on the portfolio is 2.8%. The risk-free rate is 3.96%. To accomplish this, the best choice would be to:

A) take a long position in 152 contracts.

B) take a short position in 152 contracts.

C) take a short position in 156 contracts.

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The negative sign indicates the need to take a short position.