Derivatives

2. a) A pension fund has an equity portfolio that is worth $18,450,000 based on the yesterday's closing prices in New York Stock Exchange (NYSE). The portfolio consists of stocks quoted in NYSE and its market beta is 0.95. S&P 500 index is currently at 2 050 and the contract size for S&P 500 futures is 50 times the futures index number. al) How could the pension fund hedge against the stock market risk for the next 4 months with the futures contracts on S&P 500 index for which the bid and ask quotes are as follows (please remember to also tell whether the long or short position is appropriate and for the required purpose): bid ask highest lowest latest volume SPM16 SPU16 SPZ16 2036.50 2029.00 2020.00 2037.50 2031.00 2025.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 expiration date 2016-06-09 2016-09-08 2016-12-08 0 0 0 open interest 0 0 0 settlement price 0 0 0 0.00 a2) Estimate the 5-day 99% VaR for the portfolio assuming that its annual volatility calculated on the basis of weekly returns from the most recent 1-year time window is 31.75%. 2. a) A pension fund has an equity portfolio that is worth $18,450,000 based on the yesterday's closing prices in New York Stock Exchange (NYSE). The portfolio consists of stocks quoted in NYSE and its market beta is 0.95. S&P 500 index is currently at 2 050 and the contract size for S&P 500 futures is 50 times the futures index number. al) How could the pension fund hedge against the stock market risk for the next 4 months with the futures contracts on S&P 500 index for which the bid and ask quotes are as follows (please remember to also tell whether the long or short position is appropriate and for the required purpose): bid ask highest lowest latest volume SPM16 SPU16 SPZ16 2036.50 2029.00 2020.00 2037.50 2031.00 2025.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 expiration date 2016-06-09 2016-09-08 2016-12-08 0 0 0 open interest 0 0 0 settlement price 0 0 0 0.00 a2) Estimate the 5-day 99% VaR for the portfolio assuming that its annual volatility calculated on the basis of weekly returns from the most recent 1-year time window is 31.75%