2.1

A company has a R20 million portfolio with a beta of 1.2. It would like to use futures contracts on the ALSI to hedge its risk. The ALSI index futures is currently trading at 48 600, and each contract is for delivery R1 times the index size. What is the optimal hedge ratio to minimize the risk? [4]

2.2.

You are a miller in Randfontein and is worried that the price of white maize will rise in March 2021 due to a shortage of maize that we will experience in March. The following information is at your disposal: 3 WMAZ March 21 futures price = R3540 Spot price on 3 Dec 2020 = R3100 Area differential = R0

2.2.1

/ List the possible steps that you can take to hedge yourself against price risk. [3]

2.2.2

Assume that you decided to make use of futures contracts. Show that your hedging strategy worked if: The WMAZ March21 futures price traded at R2900 on expiry Initial margin= R10 000/contract You decided to close your futures position and buy the maize on the sport market at R2900/t. [4]

2.2.3

Show that your hedging strategy worked if: The WMAZ March21 futures price traded at R4000 on expiry Initial margin = R10 000/contract You decided to close your futures position and buy the maize on the sport market at R4000/t. [4]

Financial markets