28. Robert Chen, CFA, is reviewing the characteristics of derivative securities and their use in portfolios.

a. Chen is considering the addition of either a short position in stock index futures or a long position in stock index (put) options to an existing well-diversified portfolio ofequi ty securi ties. Contrast the way in which each of these two alternatives would affect the risk and return of the resulting combined portfolios.

b. Four factors affect the value of a futures contract on a stock index. Three of these factors are the current price of the stock index, the time remaining until the contract maturity (delivery) date, and the dividends on the stock index. Identify the fourth factor and explain how and why changes in this factor affect the value of the futures contract.

c. Six factors affect the value of call options on stocks. Three of these factors are the current price of the stock, the time remaining until the option expires, and the dividend on the stock. Identify the other three factors and ex-

plain how and why changes in each of these three factors affect the value of call options.