An investor owns a portfolio consisting of $450,000 of IBM shares and $550,000 of Apple shares. Apple shares have a market index beta of 1.2 whereas IBM shares have a market index beta of 0.9. The investor wishes to take a risk-minimizing hedge for this portfolio using S&P 500 index futures. The current futures prices for the S&P500 index is $2600.00 and the futures contract is for 10 units of the index. What position should the investor take in the futures contract. Please state your answer as the fractional number of contracts, and whether his/her position should be long or short.

An investor owns a portfolio consisting of $450,000 of IBM shares and $550,000 of Apple shares. Apple shares have a market index beta of 1.2 whereas IBM shares have a market index beta of 0.9. The investor wishes to take a risk-minimizing hedge for this portfolio using S&P 500 index futures. The current futures prices for the S&P500 index is $2600.00 and the futures contract is for 10 units of the index. What position should the investor take in the futures contract. Please state your answer as the fractional number of contracts, and whether his/her position should be long or short.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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The stocks of Cee Mobile Limited is currently trading at $73 each. The call option on the company's stock has an exercise price of $70, with fifty (50) days remaining to expiration. It is assumed that the yield on treasury bills is currently 2%, while the volatility of the stock price is estimated as being 35%. Required: i. Using the Black-Scholes-Merton (BSM) model, calculate the value of the Call option, given the above parameters. Show all relevant workings. ii. Of the value computed, how much is the intrinsic value and the time value of the Call option? iii. Using the BSM model and the information given above, calculate the value of the Put option on the stock, with a similar strike price and days to expiration.
Assume that you have been given the following information on Purcell Corporation's call options: Inputs Intermediate Calculations Current stock price = $12 d1 = 0.32863 Time to maturity of option = 9 months d2 = 0.05477 Variance of stock return = 0.10 N(d1) = 0.62878 Strike price of option = $12 N(d2) = 0.52184 Risk-free rate = 7% According to the Black-Scholes option pricing model, what is the option's value? Do not round intermediate calculations. Round your answer to the nearest cent. Use only the values provided in the problem statement for your calculations. $
A portfolio manager is wanting to add futures to an equity portfolio to change the beta of the overall portfolio. The following data is available: • Current Portfolio Beta: 0.25 • Current Portfolio Value: $10,000,000 • Current Futures Price: $2,500 • One contract is on $250x the index • Target Beta: 3.5 How many futures contracts should be added to the portolio to meet the target beta? Round to 0 decimal places.
If you create a portfolio for your client with 73 percent invested in the S&P 500 U.S. stock index (which includes T) and the remaining 27 percent in the Vanguard Gold index. The expected return is 30 percent for the S&P 500 and 3 percent for the Vanguard Gold index. The risk is 7.5 percent for the S&P 500 and 5 percent for the Vanguard Gold index. Estimate the portfolio’s return and risk given that the correlation coefficient between the S&P 500 and the Vanguard Gold index is -0.3? (e) Evaluate the effect of a change in the correlation coefficient to 0.8 on the portfolio’s return and risk.
The six-month S&P 500 futures index you are considering buying. The current value of the index is 940. The six-month interest rate is 6% and the expected dividend rate for the underlying stocks is 3% over that period. Ignoring all other factors, calculate today’s fair value for the six-month future
A pension fund currently has $50 million in the S&P 500 index and $50 million in Treasury bills (risk-free asset). The current 6-month S&P 500 futures price is 1390.5, and one contract is on $250 times the index. a) Suppose that the manager is concerned about the performance of the index over the next 6 months. Explain what position in the S&P 500 futures he should take to eliminate all exposure to the market over the next six months. b) If the manager decides to switch to a portfolio that invests 30% in the index and 70% in T-bills for a period of 6 months, explain how he could achieve that using S&P 500 futures.
You want to create a $72,000 portfolio comprised of two stocks plus a risk-free security. Stock A has an expected return of 13.6 percent and Stock B has an expected return of 14.7 percent. You want to own $25,000 of Stock B. The risk-free rate is 3.6 percent and the expected return on the market is 12.1 percent. If you want the portfolio to have an expected return equal to that of the market, how much should you invest in the risk-free security? Seleccione una: O a. $12,775 Qb. $13,315 O c. $13,550 O d. $12,987 O e. $12,921 4
A portfolio has a value P(E, S), so that the value P is a function of E, the price of a Euro in Canadian dollars, and S, the level of the TSX stock index. Presently the portfolio is worth $364,000, while a Euro is $1.50 Canadian, and the index is S = 18,000. If the partial derivatives of P have values ∂P ∂E = 68,000, and ∂P ∂S = −27, what approximately will the portfolio value be if the price of a Euro goes down by 0.04 and the stock index goes down by 413?
It is 16th July. A company has a portfolio of stocks worth $100 million. The beta of the portiolio is 1.2. The company would like to use the December futures contract on a stock index to change the beta of the portfolio to 0.5 during the period 16th July to 16th November. The index is currently 1,000, and each contract is $250 times the index. What position should the company take?

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