Assume that an investor with $850,000 to invest believes that the stock market will advance but has
Question:
Assume that an investor with $850,000 to invest believes that the stock market will advance but has been unable to select the stocks he or she wishes to hold. The S&P 500 futures contract is at 1140. By purchasing three S&P futures contracts, each representing an aggregate dollar value of 1140 $250 $285,000, the investor will gain if the market advances. As shown in Table 20‐2, a 10 percent market advance increases the value of the futures contract $28,500 (1140 1.10 1254; 1254 $250 $313,500; $313,500 $285,000 $28,500 ). With three contracts, the total gain is three times larger, or $85,500. Even if the investor has to pay 10 percent more (or $85,000) for stocks, he or she still gains because the net hedge result is positive ($85,500 vs. $85,000).
Step by Step Answer:
Investments Analysis And Management
ISBN: 9781118975589
13th Edition
Authors: Charles P. Jones, Gerald R. Jensen