Overview

You are working for an investment bank and you are responsible for three high net worth clients. The first has a share portfolio valued at approximately $1,000,000 and is concerned that the share market might fall. The second client acts on behalf of a large Australian company which is looking to invest in a major project at the end of the year and is concerned that interest rates may rise. The third client works for a large Queensland manufacturing company whose major expense is electricity. This client is concerned about a rise in electricity prices.

Description Question 1 (6 Marks)

On January 1^st, 2017, your first client established a portfolio with $1,000,000. They purchased the top 10 Australian shares at the time, giving them proportions according to the market capitalisation. They have recently become concerned about a potential market downturn over the next three months due to a mutated COVID strain and has asked you to set up a hedge for her using SPI200 futures contracts. The contract will be established today (19^thFebruary 2021) and should be in place until at least May 19^th, 2021.

Step 1 Determine the beta of the portfolio.

Data from Yahoo!Finance for the 10 shares in the portfolio as well as the combined portfolio and the ASX200 is provided in the Assignment_Part_A Data and Results.xlsx spreadsheet on Blackboard. Determine the beta of the portfolio.

Step 2 Choose an appropriate futures contract.

A snapshot of SPI200 futures prices as of February 19^th is provided. Determine which contract should be chosen stating the day of expiry for the contract. Calculate the theoretical value for the contract, state all assumptions and provide the source of your assumptions. Discuss any differences between the theoretical value you have calculated and the listed value of the forward contract.

Step 3 Determine the number of futures contracts required.

Determine the initial value of the futures contract and the number of contracts that should be purchased to hedge this position. Be sure to state whether they should be buy or sell positions and hence whether you have used a bid or offer price.

Step 4 Provide the financial outcome for two (2) potential future scenarios.

Determine the financial outcome for your client assuming two different potential future outcomes: 1) an ending SPI200 price of 6000 and 2) an ending SPI200 price of 7500.

BAB Futures Contracts EXPIRY DATE V BID OFFER LAST TRADE CHANGE VOLUME PREVIOUS SETTLEMENT O Mar 21 99.980 99.990 537 99.990 As of 19/02/21 99.990 As of 18/02/21 Jun 21 99.970 99.980 1107 99.980 As of 19/02/21 99.980 As of 18/02/21 Sep 21 99.950 99.960 V 0.01 162 99.950 As of 19/02/21 99.960 As of 18/02/21 Dec 21 99.930 99.940 V 0.01 1230 99.930 As of 19/02/21 99.940 As of 18/02/21 Mar 22 99.910 99.920 V 0.01 2714 99.910 As of 19/02/21 99.920 As of 18/02/21 Jun 22 99.880 99.890 3519 99.890 As of 19/02/21 99.890 As of 18/02/21 Sep 22 99.840 99.850 V 0.02 2500 99.840 As of 19/02/21 99.860 As of 18/02/21 Dec 22 99.780 99.790 99.790 V 0.02 4787 99.810 Current 90 day bank bill rate 0.0107% X ASX o LOGIN 24 hour delayed BBSW rates TENOR BID ASK MID METHOD YIELD RANGE (BPS) 1 MONTH 0.0550 -0.0450 0.0050 NBBO 2 MONTH 0.0600 -0.0400 0.0100 NBBO 3 MONTH 0.0607 -0.0393 0.0107 WLSR 4 MONTH 0.0680 -0.0320 0.0180 WLSR -- 5 MONTH 0.0700 -0.0300 0.0200 NBBO 6 MONTH 0.0729 -0.0271 0.0229 WLSR As of 23/02/2021 BAB Futures Contracts EXPIRY DATE V BID OFFER LAST TRADE CHANGE VOLUME PREVIOUS SETTLEMENT O Mar 21 99.980 99.990 537 99.990 As of 19/02/21 99.990 As of 18/02/21 Jun 21 99.970 99.980 1107 99.980 As of 19/02/21 99.980 As of 18/02/21 Sep 21 99.950 99.960 V 0.01 162 99.950 As of 19/02/21 99.960 As of 18/02/21 Dec 21 99.930 99.940 V 0.01 1230 99.930 As of 19/02/21 99.940 As of 18/02/21 Mar 22 99.910 99.920 V 0.01 2714 99.910 As of 19/02/21 99.920 As of 18/02/21 Jun 22 99.880 99.890 3519 99.890 As of 19/02/21 99.890 As of 18/02/21 Sep 22 99.840 99.850 V 0.02 2500 99.840 As of 19/02/21 99.860 As of 18/02/21 Dec 22 99.780 99.790 99.790 V 0.02 4787 99.810 Current 90 day bank bill rate 0.0107% X ASX o LOGIN 24 hour delayed BBSW rates TENOR BID ASK MID METHOD YIELD RANGE (BPS) 1 MONTH 0.0550 -0.0450 0.0050 NBBO 2 MONTH 0.0600 -0.0400 0.0100 NBBO 3 MONTH 0.0607 -0.0393 0.0107 WLSR 4 MONTH 0.0680 -0.0320 0.0180 WLSR -- 5 MONTH 0.0700 -0.0300 0.0200 NBBO 6 MONTH 0.0729 -0.0271 0.0229 WLSR As of 23/02/2021