Not long ago, Vanessa Woods sold her company for several million dollars (after taxes). She took some of that money and put it into the stock market. Today, Vanessa's portfolio of blue-chip stocks is worth $4.1 million. Vanessa wants to keep her portfolio intact, but she's concermed about a developing weakness in the market for blue chips. She decides, therefore, to hedge her position with six-month futures contracts on the E-mini Dow Jones Industrial Average, which are currently trading at 11,702. a. Why would she choose to hedge her portiolio with the DJIA rather than the SaP 500 ? b. Given that Vanessa wants to cover the full $4.1 million in her portfolio, describe how she would go about setting up this hedge. c. If each contract required a margin deposit of $4,802, how much money would she need to set up this hedge? d. Assume that over the next 6 months stock prices do fall, and the value of Vanessa's portfolio drops to $3.6 million. If E-mini DJlA futures contracts are trading at 9.977, how much will she make (or lose) on the futures hedge? Is it enough to offet the loss in her portfolio? That is, What is her net profit or loss on the hedge? e. Will she now get her margin deposit back, or is that a "sunk cost"-gone forever? a. Why would she choose to hedge her portiolio with the DJlA rather than the S\&P 500 ? (Select the best answer beiow.) Not long ago, Vanessa Woods sold her company for several million dollars (after taxes). She took some of that money and put it into the stock market. Today, Vanessa's portfolio of blue-chip stocks is worth $4.1 million. Vanessa wants to keep her portfolio intact, but she's concermed about a developing weakness in the market for blue chips. She decides, therefore, to hedge her position with six-month futures contracts on the E-mini Dow Jones Industrial Average, which are currently trading at 11,702. a. Why would she choose to hedge her portiolio with the DJIA rather than the SaP 500 ? b. Given that Vanessa wants to cover the full $4.1 million in her portfolio, describe how she would go about setting up this hedge. c. If each contract required a margin deposit of $4,802, how much money would she need to set up this hedge? d. Assume that over the next 6 months stock prices do fall, and the value of Vanessa's portfolio drops to $3.6 million. If E-mini DJlA futures contracts are trading at 9.977, how much will she make (or lose) on the futures hedge? Is it enough to offet the loss in her portfolio? That is, What is her net profit or loss on the hedge? e. Will she now get her margin deposit back, or is that a "sunk cost"-gone forever? a. Why would she choose to hedge her portiolio with the DJlA rather than the S\&P 500 ? (Select the best answer beiow.)
