Financial Futures and Options Homework Assignment No. 3 - Optimal Hedging with Futures (15 points) QUESTION 1(2 points each section, a total of 6 points): On October, you own 10,000 shares of Don't Worry Be Happy Inc. The spot price is $90 per share. You plan to sell the shares in November to pay for a house you have just bought. You are concerned that share prices will FALL substantially by November. There is a December futures contract on 100 shares of Don't Worry Be Happy Inc. The futures price is $91 per share. You estimate the following regression for the hedging period: Changes in the share price = 0.9 x Changes in the futures price. (a) Design an optimal hedging strategy. (b) Assume that by November the spot price fell by $4.5 to $85.5 per share, and the futures price changed as estimated by the regression. What is the total gain/loss from the spot position? What is the total gain/loss from the futures position? How much money do you get from selling the shares and closing the hedge? (c) Assume that by November the spot price rose by $4.5 to $94.5 per share, and the futures price changed as estimated by the regression. What is the total gain/loss on the spot position? What is the total gain/loss on the futures position? How much money did you get from selling the shares and closing the hedge? Financial Futures and Options Homework Assignment No. 3 - Optimal Hedging with Futures (15 points) QUESTION 1(2 points each section, a total of 6 points): On October, you own 10,000 shares of Don't Worry Be Happy Inc. The spot price is $90 per share. You plan to sell the shares in November to pay for a house you have just bought. You are concerned that share prices will FALL substantially by November. There is a December futures contract on 100 shares of Don't Worry Be Happy Inc. The futures price is $91 per share. You estimate the following regression for the hedging period: Changes in the share price = 0.9 x Changes in the futures price. (a) Design an optimal hedging strategy. (b) Assume that by November the spot price fell by $4.5 to $85.5 per share, and the futures price changed as estimated by the regression. What is the total gain/loss from the spot position? What is the total gain/loss from the futures position? How much money do you get from selling the shares and closing the hedge? (c) Assume that by November the spot price rose by $4.5 to $94.5 per share, and the futures price changed as estimated by the regression. What is the total gain/loss on the spot position? What is the total gain/loss on the futures position? How much money did you get from selling the shares and closing the hedge
