ZuoTi.Pro
Question

On July 1, an investor holds 50,000 shares of a certain stock. The market price is...

On July 1, an investor holds 50,000 shares of a certain stock. The market price is 30 per share. The investor is interested in hedging against movements in the market over the next 2 months and decides to use an October stock index futures contract. The index level is currently 740 and one contract is for delivery of 500 times the index. The current three month futures price is 750. The current interest rate is 6% per annum and the dividend yield on the index is 3% per annum, continuously compounded. The beta of the stock is 1.25. What strategy should the investor follow? How successful will the hedge be if the stock if the price of the index in two months is 800. Please show the effectiveness of your hedge, if the futures price in two months is 805. If the investor wanted to change the beta of his portfolio to 0.8, what strategy should he follow. Assume CAPM holds.

business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

A Shoat 125 x 50, 000 x 30) Contats 1 uind.be ble enehts xet thon hot yedlieted Tu capi Osset 1.25 x t 60000 x30) 나,69 ~ 5 -

0 0
Add a comment
Know the answer?
Add Answer to:
On July 1, an investor holds 50,000 shares of a certain stock. The market price is...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • On July 1, an investor holds 50,000 shares of a certain stock. The market price is...

    On July 1, an investor holds 50,000 shares of a certain stock. The market price is $30 per share. The investor is interested in hedging against movements in the market over the next month and decides to use the Sept Mini S&P 500 futures contract. The index futures price is 1,500 and one contract is for delivery of $50 times the index. The beta of the stock is 1.3. How many short Sept Mini SP500 futures does the investor need...

  • 1.2 On July 1, an investor holds 5,000 shares of a certain stock. The market price...

    1.2 On July 1, an investor holds 5,000 shares of a certain stock. The market price is $30 per share. The investor is interested in hedging against movements in the market over the next month and decides to use the September Mini 500 S&P 500 futures contract. The index futures price is currently 1,504 and one contract is for delivery of $50 times the index. The beta of the stock is 0.95. What strategy should the investor use? Under what...

  • A German investor holds a portfolio of British stocks. The market value of the portfolio is...

    A German investor holds a portfolio of British stocks. The market value of the portfolio is £20 million, with a ß of 1.5 relative to the FTSE index. In November, the spot value of the FTSE index is 4,000. The dividend yield, euro interest rates, and pound interest rates are all equal to 4% (flat yield curves). The German investor fears a drop in the British stock market (but not in the British pound). The size of FTSE stock index...

  • A fund manager has a portfolio worth $50 million with a beta of 0.87. The manager...

    A fund manager has a portfolio worth $50 million with a beta of 0.87. The manager is concerned about the performance of the market over the next two months and plans to use three-month futures contracts on a well-diversified index to hedge its risk. The current level of the index is 1250, one contract is on 250 times the index, the risk-free rate is 6% per annum, and the dividend yield on the index is 3.15% per annum. The current...

  • A large mutual fund holds 100,000 shares of IM common stock which is currently trading at...

    A large mutual fund holds 100,000 shares of IM common stock which is currently trading at $160/share with beta 1.25. The NYSE major market index futures contract trade at $500 times the index which for the June contract is at 578.55. The fund managers are worried about the volatility of the tech stock in their portfolio do they want to hedge. Construct a hedge position (short or long) on the basis of this fear. In June their fear are realized....

  • Please explain how to obtain the above answer (step by step explanation). Thank you. 40. Pigeon Ltd holds a well-diversified portfolio of shares with a current market value on 1 May 2014 of $900 000...

    Please explain how to obtain the above answer (step by step explanation). Thank you. 40. Pigeon Ltd holds a well-diversified portfolio of shares with a current market value on 1 May 2014 of $900 000. On this date Pigeon Ltd decides to hedge the portfolio by taking a sell position in ten SPI futures units. The All Ordinaries SPI is 2980 on 1 May 2014. A unit contract in SPI futures is priced based on All Ordinaries SPI and a...

  •       A bond fund currently holds a bond portfolio with a face value of $10 million....

          A bond fund currently holds a bond portfolio with a face value of $10 million. The current market value of the portfolio is only 92.2% of face, however. The fund’s managers anticipate a rise in bond yields (interest rates) in the near future, so they desire a T-bond hedging strategy to protect themselves. Given their rate expectations, should they short or go long in T-bond futures? Explain. The risk managers use $100,000 face value T-bond contracts. If they use...

  • 9. Hedging strategy to protect against falling prices Price fluctuations in commodities can have significant consequences...

    9. Hedging strategy to protect against falling prices Price fluctuations in commodities can have significant consequences for companies, especially if the fluctuation involves a prime raw material for a company. Different companies will adopt different strategies to manage the risk in price fluctuations, indluding adjusting the timing of their commodity purchases, maintaining a safety stock of their raw materials, and hedging Consider the case of Cranked Coffee Company, a large copper-producing company The company's cost of producing copper is about...

  • Suppose you manage an equity portfolio. You are concerned that equities, as an asset class, are...

    Suppose you manage an equity portfolio. You are concerned that equities, as an asset class, are temporarily overvalued, so you implement a hedge, utilizing the S&P 500 index futures contract. Other important information is as follows: Your equity portfolio is $5M and has a beta equal to 1.5. The riskless rate is 4% per annum. The S&P 500 index is currently equal to 1,000 and has a dividend yield of 1% per annum. The S&P 500 index futures price is...

  • A farmer currently holds 6,000 bushels of corn. The local mill is offering a price of...

    A farmer currently holds 6,000 bushels of corn. The local mill is offering a price of $3.25 per bushel. Currently, a three-month futures contract is trading at $3.45. The farmer is considering selling to the local mill or holding the corn in inventory and selling a futures contract now. The farmer can store and insure the corn at a cost of 18 cents per bushel per annum to be paid monthly in advance at the beginning of each month. Interest...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT