5. A pension fund manager expects to receive a cash inflow of $50,000,000 in three months and...

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5. A pension fund manager expects to receive a cash inflow of $50,000,000 in three months and wants to use futures contracts to take a $17,500,000 synthetic position in stocks and $32,500,000 in bonds today. The stock would have a beta of 1.15 and the bonds a modified duration of 7.65. A stock index futures contract with a beta of 0.93 is priced at

$175,210. A bond futures contract with a modified duration of 5.65 is priced at $95,750.

A. Calculate the number of stock and bond futures contracts the fund manager would have to trade in order to synthetically take the desired position in stocks and bonds today. Indicate whether the futures positions are long or short.

B. When the futures contracts expire in three months, stocks have declined by 5.4% and bonds have declined by 3.06%. Stock index futures are priced at $167,559, and bond futures are priced at $93,586. Show that profits on the futures positions are essentially the same as the change in the value of stocks and bonds during the three-month period.

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Derivatives

ISBN: 9781119850571

1st Edition

Authors: CFA Institute

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