You have been assigned to implement a three-month hedge for a stock mutual fund portfolio that...

50.1K

Verified Solution

Question

Finance

You have been assigned to implement a three-month hedge for astock mutual fund portfolio that primarily invests in medium-sizedcompanies. The mutual fund has a beta of 1.46 measured relative tothe S&P Midcap 400, and the net asset value of the fund is $186million.
a. Should you be long or short in the Midcap400 futures contracts?
Long
Short
b. Assuming the Midcap 400 Index is at 649 andits futures contract size is 500 times the index, determine theappropriate number of contracts to use in designing yourcross-hedge strategy. (Do not round intermediatecalculations. Round your answer to the nearest wholenumber.)
2.Suppose the 6-month S&P 500 futures priceis 1,537.77, while the cash price is 1,525.14. What is theimplied difference between the risk-free interest rate andthe dividend yield on the S&P 500?
3. Suppose you want to hedge a $550 million bond portfolio witha duration of 5.2 years using 10-year Treasury note futures with aduration of 6.7 years, a futures price of 108, and 9 months toexpiration. The multiplier on Treasury note futures is $100,000.How many contracts do you buy or sell?
4. A call option currently sells for $7.75. It has a strikeprice of $85 and seven months to maturity. A put with the samestrike and expiration date sells for $6.00. If the risk-freeinterest rate is 3.2 percent, what is the current stock price?
5. Suppose you buy one SPX call option contract with a strike of1300. At maturity, the S&P 500 Index is at 1321. What is yournet gain or loss if the premium you paid was $14?
6.What is the value of a call option if the underlying stockprice is $78, the strike price is $80, the underlying stockvolatility is 42 percent, and the risk-free rate is 5.5 percent?Assume the option has 110 days to expiration.
7.You are managing a pension fund with a value of $480 millionand a beta of 0.90. You are concerned about a market decline andwish to hedge the portfolio. You have decided to use SPX calls. Howmany contracts do you need if the delta of the call option is 0.64and the S&P Index is currently at 1250?

Answer & Explanation Solved by verified expert

4.0 Ratings (704 Votes)

You have asked 7 unrelated questions in a single post Further first question has multiple sub parts I will address all the sub parts of the first question Please post the balance questions one by one in a See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

You have been assigned to implement a three-month hedge for astock mutual fund portfolio that primarily invests in medium-sizedcompanies. The mutual fund has a beta of 1.46 measured relative tothe S&P Midcap 400, and the net asset value of the fund is $186million.a. Should you be long or short in the Midcap400 futures contracts?LongShortb. Assuming the Midcap 400 Index is at 649 andits futures contract size is 500 times the index, determine theappropriate number of contracts to use in designing yourcross-hedge strategy. (Do not round intermediatecalculations. Round your answer to the nearest wholenumber.)2.Suppose the 6-month S&P 500 futures priceis 1,537.77, while the cash price is 1,525.14. What is theimplied difference between the risk-free interest rate andthe dividend yield on the S&P 500?3. Suppose you want to hedge a $550 million bond portfolio witha duration of 5.2 years using 10-year Treasury note futures with aduration of 6.7 years, a futures price of 108, and 9 months toexpiration. The multiplier on Treasury note futures is $100,000.How many contracts do you buy or sell?4. A call option currently sells for $7.75. It has a strikeprice of $85 and seven months to maturity. A put with the samestrike and expiration date sells for $6.00. If the risk-freeinterest rate is 3.2 percent, what is the current stock price?5. Suppose you buy one SPX call option contract with a strike of1300. At maturity, the S&P 500 Index is at 1321. What is yournet gain or loss if the premium you paid was $14?6.What is the value of a call option if the underlying stockprice is $78, the strike price is $80, the underlying stockvolatility is 42 percent, and the risk-free rate is 5.5 percent?Assume the option has 110 days to expiration.7.You are managing a pension fund with a value of $480 millionand a beta of 0.90. You are concerned about a market decline andwish to hedge the portfolio. You have decided to use SPX calls. Howmany contracts do you need if the delta of the call option is 0.64and the S&P Index is currently at 1250?