On the 15th of January 2019, an investor holds an equity portfolio that is worth £15 million based on yesterday’s closin
Posted: Sun May 08, 2022 10:13 am
On the 15th of January 2019, an investor holds an equity
portfolio that is worth £15 million based on yesterday’s closing
prices in London Stock Exchange. The portfolio consists of UK
stocks and its market beta is 0.8. The FTSE 100 index is currently
at 6000.00 and the contract size is 100 times index number. The
index pays a dividend of 4% per annum.
The risk-free interest rate is 3% per annum. The investor wants
to hedge against future price decline of his equity portfolio for
the next six months using the FTSE index futures. The current price
for the futures contract on 15/01/2019 is £6010.00 and the maturity
date is 15/07/2019.
1. Suggest the optimal hedging position by using the
above-mentioned futures contracts.
2. If the futures price at the maturity date is 5410.00. What is
the gain from holding the futures position?
3. What position would be appropriate to reduce the beta of the
portfolio to 0.3?
4. Suppose that the index turns out to be 5400 at the maturity
of the futures contract. What is the expected return (%) on the
portfolio during the six-month period?
5. What is the expected value of the portfolio in six months
including dividends and what is the total value of the position in
six months?
portfolio that is worth £15 million based on yesterday’s closing
prices in London Stock Exchange. The portfolio consists of UK
stocks and its market beta is 0.8. The FTSE 100 index is currently
at 6000.00 and the contract size is 100 times index number. The
index pays a dividend of 4% per annum.
The risk-free interest rate is 3% per annum. The investor wants
to hedge against future price decline of his equity portfolio for
the next six months using the FTSE index futures. The current price
for the futures contract on 15/01/2019 is £6010.00 and the maturity
date is 15/07/2019.
1. Suggest the optimal hedging position by using the
above-mentioned futures contracts.
2. If the futures price at the maturity date is 5410.00. What is
the gain from holding the futures position?
3. What position would be appropriate to reduce the beta of the
portfolio to 0.3?
4. Suppose that the index turns out to be 5400 at the maturity
of the futures contract. What is the expected return (%) on the
portfolio during the six-month period?
5. What is the expected value of the portfolio in six months
including dividends and what is the total value of the position in
six months?