clearlycanadian

An S&P500 index manager knows that he will have $60,000,000 in funds available in three months. He is very bullish on the stock market and would like to hedge the cash inflow using S&P 500 futures contracts. The S&P 500 futures contract stands at 1100.00 and one contract is worth 250 times the index. Which of the following is the most accurate hedge for this portfolio?

A) Sell 218 contracts.

B) Buy 284 contracts.

C) Buy 218 contracts.

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In order to be hedged against stock price increases, S&P 500 futures contracts have to be purchased. The quantity of contracts to buy is computed as follows:
# contracts = (beta)(Portfolio value) ÷ (futures price)(contract multiplier)
                 = (1)(60,000,000) ÷ (1100)(250) @ 218.18 = 218 contracts

clearlycanadian

A manager has a $100 million portfolio that consists of 50% stock and 50% bonds. The beta of the stock position is 1. The modified duration of the bond position is 5. The manager wishes to achieve an effective mix of 60% stock and 40% bonds. The price and beta of the stock index futures contracts are $277,000 and 1.1 respectively. (The futures price includes the effect of the index multiplier.) The price, modified duration, and yield beta of the futures contracts are $98,000, 6, and 1 respectively. What is the appropriate strategy?

A) Go long 53 bond futures and go long 40 stock index futures.

B) Short 40 bond futures and go long 106 stock index futures.

C) Short 85 bond futures and go long 33 stock index futures.

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Since the manager wishes to increase the equity position and decrease the bond position by $10 million (10% of $100 million), the correct strategy is to take a short position in the bond futures and a long position in the stock index futures:

number of bond futures = -85.03 = [(0 − 5) / 6]($10,000,000 / $98,000)
number of stock futures = 32.82 = [(1 − 0) / 1.1]($10,000,000 / $277,000)

clearlycanadian

A manager has a 70/30 stock and bond portfolio. To synthetically create a portfolio that is 60 percent stock and 40 percent bonds, the manager should:

A) go long the bond futures and short the stock index futures.

B) go long both bond futures and stock index futures.

C) short the bond futures and go long the stock index futures.

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This move will accomplish the goal by reducing the exposure to equity and increasing the exposure to bonds.

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.

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 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

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

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

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

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.