A fund manager has a portfolio worth $95 million with a beta of 1.16. The manager is concerned about theperformance of the market over the next two months and plans to use three-month futures contracts on theS&P 500 to hedge the risk. The current level of the S&P 500 index is 2,675, the risk-free rate is 2% per annum,and the dividend yield on the index is 4% per annum. The current 3-month S&P 500 index futures price is 2,660,and one contract is on 250 times the index. (a) What position should the fund manager take to eliminate all riskexposure to the market over the next two months? (B' = 0) How many three-month S&P 500 futures contractsshould the fund manager buy or sell now? (Rounding to the nearest whole number.) (b) Calculate the effect ofyour strategy on the fund manager's returns if the level of the S&P 500 index in two months is 2,585. Assumethat the 3-month S&P 500 index futures price is 2,570 in two months. What would be the expected value of thefund manager's hedged portfolio (including the spot and futures positions) in two months?

The objective of the question is to determine the number of futures contracts the fund manager…

Answered: A fund manager has a portfolio worth…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 15P

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A fund manager has a portfolio worth $100 million with a beta of 1.5. 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 level of the index is 2250, one contract is on 250 times the index, the risk-free rate is 2%, and the dividend yield on the index is 1.7% per year. (Assume all the rates are continuously compounded.) What is the theoretical futures price for the three-month futures contract? What position should the fund manger take to eliminate all exposure to the market over the next two months? Calculate the effect of your strategy on the fund manager’s returns if the level of the market in two months is 2,000, 2,200, 2,500, 2,800, and 3,000.
A fund manager has a portfolio worth $55 million with a beta of 1.37. The manager is concernedabout the performance of the market over the next five months and plans to use six-month futurescontracts on the S&P 500 to hedge the risk. The current level of the index is 3,000, one contract ison 250 times the index, the risk-free rate is 5% per annum, and the dividend yield on the index is3% per annum. The current 6-month futures price is 3,030. The fund manager takes a position inS&P 500 index futures to eliminate half of the exposure to the market over the next five months.Calculate the effect of your strategy on the fund manager’s returns if the level of the market in fivemonths is 2,950 and one-month futures price is 1% higher than the index level in five months.
Suppose that a portfolio management company manages an investment fund. The fund manager observes a bond in the market and intends to add it to the fund portfolio. The bond has a 100.000 TL par value, 10% coupon rate (coupon payments are annual) and a 2-years maturity. The business model is to “hold-until-maturity”. The company purchases the bond at the beginning of the year when the market yields are 12%. After exactly 1 year of investment, market yields increase to 14%. What would be the approximate profit or loss amount in the income statement for that 1-year period? A) 1.723 TL loss B) 10.191 TL profit C) 9.871 TL profit D) 1.594 TL loss E) OTHER
The manager of a well-diversified portfolio with a market value of $200 million that mirrors the S&P 500 wants to hedge the portfolio against a market decline in value over the next six months. The portfolio manager wants to use the Mini-S&P 500 contract for hedging. The contract multiplier for this futures contract is $50. The futures price for the contract at the date that the hedge is put on is 4,200. a. Should the portfolio manager buy or sell the futures contract. Explain why. b. How many contracts should the portfolio manager sell or buy? c. Suppose at the delivery date (six months from now), the value of the S&P 500 is 3,800. Show what the outcome for this hedge will be.
. A portfolio manager follows a duration-matched strategy in his funds. His bond portfolio has a durationof 5.3 years, with a market value $8,400,500. He plans to reduce the duration of his bond portfolio to 4.5years. Assume that he can use 5-year T-note futures contracts to hedge the risk, with one-tick changes ininterest rates, this futures contract value will change by $25. Calculate the number of futures contracts thatthe manager should long or short.
A portfolio manager decides to adjust the beta of his $101148 equity portfolio from 0.5 to 1.3 for the next five months. The manager selects a future on the market index, which is currently traded at $487, to adjust the beta of his equity portfolio. The expectation about the market underpinning the adjustment of beta and the number of futures contracts the manager should take are: a. The market will be moving up, and a long position in 166 futures contracts should be held b. The market will be moving down and a short position in 104 futures contracts should be held c. The market will be moving down, and a long position in 270 futures contracts should be held d. The market will be moving up, and a short position in 166 futures contracts should be held Which of the following best describes the role of central clearing parties a. CCPs are used to manage price risk of futures transactions b. CCPs services are used in all OTC derivative transactions c. CCPs help market participants to…
MLC Fund Management is considering the following three (3) options for their new investment portfolio: Option 1 - A non-callable corporate bond that pays a coupon rate of 8% annually. The bond will mature in 30 years. The yield-to-maturity (YTM) of the bond is 7.5% and the face value of the bond is $1 000. Option 2 - An ordinary share which just paid a dividend of $6.00 with a constant dividend growth rate of 5% each year. The current market price of this share is $85. Option 3 - A $100 par value preference-share which pays a fixed dividend of 6%. The required rate of return for the preference shares with the same risk is 8%. Required: a) How much should MLC pay for the corporate bond that pays the coupon annually? If the coupon is paid quarterly, what is the new bond value? b) Calculate the market required rate of return for the ordinary share. c) Compute the value of the preference share. d) Explain why a preference share is considered a hybrid between an equity and a debt…
(c) You have been assigned to implement a three-month hedge for a stock mutual fund portfolio that primarily invests in medium-sized companies. The mutual fund has a beta of 1.15 measured relative to the S&P Midcap 400, and the net asset value of the fund is $175 million. Should you be long or short in the Midcap 400 futures contracts? Assuming the Midcap 400 Index is at 1,450 and its futures contract size is 500 times the index, determine the appropriate number of contracts to use in designing your cross-hedge strategy.
A fund manager expects to have funds to invest in three months' time and plans to buy $4 million corporate bonds, currently yielding 7.00% p.a. The manager hedges their interest rate risk using three-year Treasury bond futures contracts, currently priced at 94.500. In three months time the fund manager buys $4 million corporate bonds at yield of 6.84% p.a. and closes out their futures market position at 95.250. What is the profit from closing out the futures position.
A fund manager has a well-diversified portfolio that mirrors the performance of the S&P 500and is worth $240 million. The value of the S&P 500 is 4,800, and the portfolio manager wouldlike to obtain insurance against a reduction of more than 3% in the value of the portfolio over thenext four months. The risk-free interest rate is 6% per annum. The dividend yield on both theportfolio and the S&P 500 is 4%, and the volatility of the index is 35% per annum. What amount(in dollars) of the portfolio should be sold and kept in risk-free securities for portfolio insurance?
Portfolio managers are frequently paid a proportion of the funds under management. Suppose you manage a $105 million equity portfolio offering a dividend yield (DMM) of 5.5%. Dividends and portfolio value are expected to grow at a constant rate. Your annual fee for managing this portfolio is 0.55% of portfolio value and is calculated at the end of each year. a. Assuming that you will continue to manage the portfolio from now to eternity, what is the present value of the management contract? Note: Do not round intermediate calculations. Enter your answer in millions rounded to 1 decimal places. b. What would the contract value be if you invested in stocks with a 4.5% yield? Note: Enter your answer in millions rounded to 2 decimal places. a. Present value b. Contract value milllion milllion
A hedge fund charges a management fee of 3 percent and an incentive fee of 25 percent for all returns over a benchmark return of 4%. The risk-free rate is 2% and the standard deviation of the funds continuously compounded returns has been 23%. The current net asset value is $55 per share. What is the value of all fees expressed as a percent at the start of the investment period?

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