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An investment portfolio of 1,200,000 mirrors the DAX Index. It is estimated that there will be a large decline in the market prices of the

  1. An investment portfolio of 1,200,000 mirrors the DAX Index. It is estimated that there will be a large decline in the market prices of the investment portfolio over the next 3 months. The trading information on the index futures is currently listed as below:

Contract specification

(DAX Index Futures)

Price 15,982
Value of 1 Point 25
Value of contract 399,550
Initial margin 29,801

Assume you are a fund manager, and you are required to:

  1. Establish hedging strategy to against the value of the investment portfolio at risk exposure, using DAX Index Futures. (5 marks)

  1. Calculate the leverage ratio and total margin deposit required to trade these futures contracts and discuss the power of leverage in trading futures.

(10 marks)

  1. You have hedged the investment portfolio using DAX Index futures. Assume that the market decline by 10%, calculate the outcome of the hedging and discuss the effectiveness of the hedging. (10 marks)

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