The bid and offer prices for single stock futures in Akzo Nobel are shown in Exhibit 10.12.

Exhibit 10.12 Single stock future prices for Akzo Nobel on 7 January 2011

 Each future is for 100 shares and is cash settled. Prices quoted by market makers are in euros per share. Shares are selling on the spot market for €45.65.

 You own 50,000 shares in Akzo Nobel, but you are not sure about the company’s prospects. On the one hand as Europe emerges from recession, demand for Akzo Nobel’s products will rise, leading to good share returns. On the other, Europe could have a second downturn and so Akzo Nobel’s shares will plummet. You estimate that the uncertainty will be lifted by 11 March 2011. 

(a) Describe a hedging strategy you could employ to reduce price uncertainty between now (7 January 2011) and 11 March 2011.

(b) Show the gain/losses on underlying and derivative transaction if the share price on 11 March is €50. 

(c) Show the gain/losses on underlying and derivative transaction if the share price on 11 

March is €40.

Transcribed Image Text:

AKZO NOBEL NV Codes and Classification Code Underlying AKZ Market NYSE Liffe London Vol. 07/01/11 Currency O.I. 81,030 06/01/11 Euronext Amsterdam 45.66 07/01/11 17:39 Name AKZO NOBEL ISIN NL0000009132 Market Currency Best bid 45.645 07/01/11 17:39 Best ask Time CET Last 45.66 07/01/11 17:37 Last change % -0.52 Volume 1,096,514 High 45.89 Low 45.09 Prices Delivery Time Last (CET) JAN 11 FEB 11 MAR 11 JUN 11 - - Vol Day Volume Bid Size Ask Ask Size %+/- Open High Low Settl. O.I. - - - - - - - - - 45.909 10 - - - - 45.937 10 - - - - - 45.96 81,010 45.377 - - - - -