Q1. Is a short position of a call option (=
writing a call) equivalent to a long position of a put option (=buying a
put)? Please explain.
Q2. Explain the similarities and the differences between a forward contract and a futures contract.
Chapter 2
Q3. A company enters into a long futures contract to buy 4,000 bushels
of wheat for $2.00 per bushel. The initial margin is $3,000 and the
maintenance margin is $2,000.
a. If futures price becomes $2.10 per bushel, calculate the cumulative gain.
b. What futures price change will trigger a margin call?
Chapter 3
Q4. A fund manager has a portfolio worth $20 million with a beta of 1.3.
The manager is concerned about the performance of the market over the
next two months and plans to use three month futures contracts on the
S&P 500 to hedge the risk. The current index level is 2,000 and one
futures contract is on 250 times the index (i.e., the index multiplier
is 250). The risk free rate is 3.0% per annum and the dividend yield on
the index is 2.0% per annum. The current three month futures price is
$2,100.
a. What position should the fund manager take to hedge exposure to the
market over the next two months? In other words, how many futures
contracts does the manager have to buy or sell? Specify whether it’s a
long (=buy) or short (=sell) position.
b. Calculate the effect of your strategy on the fund manager’s returns
if the index in two months is 1900, 2000, 2100, 2200 and 2300. Assume in
2 months, the one month futures price will be 0.25% higher than the
index level. For example, if the index becomes 2000 two months from now,
the index futures price will be 1.0025*2000 = 2005.00.
c. Are the total values (hedged values = stock portfolio plus futures
position) always greater than the stock (=unhedged) values, no matter
what the index becomes in 2 months? If not, does it mean the hedge was
unsuccessful? Explain.
Hint: To answer part b, replicate closely the textbook example in pages
6567. or review week 1 template as we will be discussing a very similar
example. In other words, you need to create a spreadsheet similar to
Table 3.4.
Get Answer; http://homework.ecrater.com/p/20262872/hw-1256-week-1-evt
