The board of directors of Abco Company is concerned about the downside risk of a $ 100
Question:
The board of directors of Abco Company is concerned about the downside risk of a $ 100 million equity portfolio in its pension plan. The board’s consultant has proposed temporarily (for one month) hedging the portfolio with either futures or options. Referring to the following table, the consultant states:
a. “The $ 100 million equity portfolio can be fully protected on the downside by selling (shorting) 2,000 futures contracts.”
b. “The cost of this protection is that the portfolio’s expected rate of return will be zero percent.”
Market, Portfolio, and Contract Data
Equity index level......... 99.00
Equity futures price......... 100.00
Futures contract multiplier....... 500
Portfolio beta ............. 1.20
Contract expiration (months)..... 3
Assess the accuracy of each of the consultant’s two statements.
PortfolioA portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...
Step by Step Answer:
Investments
ISBN: 978-0071338875
8th Canadian Edition
Authors: Zvi Bodie, Alex Kane, Alan Marcus, Stylianos Perrakis, Peter