You hold a diversified portfolio of German stocks with a value of 50 million. You are getting

Question:

You hold a diversified of German with a value of ‚¬50 million. You are getting worried about the outcome of the next elections and wish to hedge your German stock market risk. However, you like the companies that you hold and believe that the German stock market will do well in the long run. Transaction costs are too high to sell the now and buy them back in a few weeks. Instead, you decide to use DAX futures or options to temporarily protect the value of your Current market quotations are as follows:

You hold a diversified portfolio of German stocks with a

The standard contract size is ‚¬25 times the index for futures and ‚¬5 times the index for options.
a. What would you do to hedge your portfolio with futures?
b. What would you do to insure your portfolio with options?
c. Calculate the results of the four protection strategies: selling June futures, buying puts June 5000, buying puts June 4,950, and buying puts June 4,900. Look at the value of your portfolio, assuming that it follows the movements in the market exactly. Assume that the DAX index in June is equal to 4,800, 4,900, 5,000, 5,100, and 5,200, successively.

Stocks
Stocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing... Portfolio
A 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...