Question

A portfolio manager for Prudential Investments Limited manages a diversified Australian share portfolio, but is concerned that stock prices are likely to fall over the next three months. The manager decides to hedge by selling 400 SPI 200 futures contracts at 4955. Three months later, when the position is closed out, the contract is trading at 5010. Calculate the profit or loss on the futures transactions.

Multiple Choice

• $550 000 profit

• $550 000 loss

• $1 375 000 loss

• $1375 loss

Answer 1

Since he has sold the futures contract and the price has gone up, it would be a loss. Hence, the net loss will be:

Loss = 5010 - 4955 = 55.

Hence, the net loss will be = 55 x 400 x 25 = 550000.