Question
(a) An investor has a portfolio of stocks and he wants to protect the portfolio from adverse price fluctuations. It is October and the ASX200
(a) An investor has a portfolio of stocks and he wants to protect the portfolio from adverse price fluctuations. It is October and the ASX200 is at 7,000. The portfolio has a Beta of 1.5. The current value of the portfolio is $15million. The investor would like to protect the value of the portfolio by using December SPI futures. These are currently quoted at 7,137 (one point of the index is equal to $25). How many Dec. SPI futures contracts are needed to protect against fluctuations in the ASX200? Would you buy or sell futures in order to hedge? (3 marks)
(b) It is now December and the market has fallen. The ASX200 is currently at 6,500. The investor closes out her futures position when the December SPI futures are quoted at 6,510. Calculate the profit or loss from the futures trading. (2 marks)
(c) What is the function of the system of deposits and margin provisions used by futures market clearinghouses? Show how this system works with a numerical example. (3 marks)
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