Question: You are in charge of managing a $45.6 million equity portfolio and believe thatthe market is on about to witness a massive downturn. You are contemplating as towhether or not to move your portfolio temporarily into safe treasury bills andgovernment bonds, but you do not want to incur the transaction costs of liquidating andre-establishing your equity position. Instead, you have decided to temporarily hedgeyour equity holdings with E-mini Dow Jones index futures contracts.a) Given the scenario, should you go long or should you short the contracts? Explainyour position very briefly.b) The Dow Jones index is now at 1029. If your equity holdings are invested in amarket-index fund, exactly how many contracts should you enter given that thecontract multiplier is $325? (Round your answer to one decimal place).c) Explain and illustrate how does your answer to (b) is expected to change if the betaof your portfolio is 0.5, (if there are any changes that is).

Background: Current equity portfolio=$45.6 million i.e., long on portfolio. Market is about to…

Answered: Question: You are in charge of managing…

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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You manage a $19.5 million portfolio, currently all invested in equities, and believe that the market is on the verge of a big but short-lived downturn. You would move your portfolio tempo-rarily into T-bills, but you do not want to incur the transaction costs of liquidating and reestablishing your equity position. Instead, you decide to temporarily hedge your equity holdings with E-mini S&P 500 index futures contracts.a. Should you be long or short the contracts? Why?b. If your equity holdings are invested in a market-index fund, into how many contracts should you enter? The S&P 500 index is now at 1,950 and the contract multiplier is $50.c. How does your answer to part (b) change if the beta of your portfolio is .6?
aa.1 You are a portfolio manager, currently managing $100 million worth asset including stock and bonds. You are expecting that some your clients will withdraw their contributions and you are also afraid that both share price and bond price may slide what sort of derivative security that you may consider to hedger risk and why? Why do we say we take long or short position in the derivative contract?
1) How might a portfolio manager use financial futures to hedge risk in each of the following circumstances:a. You own a large position in a relatively illiquid bond that you want to sell.b. You have a large gain on one of your Treasuries and want to sell it, but you would like to defer the gain until the next tax year.c. You will receive your annual bonus next month that you hope to invest in long-term corporate bonds. You believe that bonds today are selling at quite attractive yields, and you are concerned that bond prices will rise over the next few weeks. ------------------------------------------------------------------------- 2) The S&P portfolio pays a dividend yield of 1% annually. Its current value is 1,300. The T-bill rate is 4%. Suppose the S&P futures price for delivery in 1 year is 1,330. I know that the value of future contract is $1,339, which is priced at $1,330, the contract is under priced by $9. Because, Value of future contract = Current Value x (1 + Risk…
Solve a,b and c please You wish to create a synthetic equity position. You believe that the price of the stock will decrease over the next year. You have the following securities available to you to create this position. Note that all options are European and Beetroot Inc does not pay dividends. Current Value of Available Securities Beetroot Inc. Equity: $10.00 Call Premium: $ 5.31 Put Premium: $ 0.50 Strike for Call or Put: $14.00 Call and Put Expiration: 1 year Annual Risk-Free Rate (annually compounded): 3% per year a) Confirm that the put-call parity holds in this case. b)Specifically, identify the transactions that you will enter into to create your position? c)At expiration, the value of the equity will have increased or decreased. Show how your synthetic position will have the same payoff as a stock-only portfolio. Show this if Beetroot Inc’s equity if the equity value increases to $100 or decreases to $5.
What is the significance of the equity breakpoint? Question 9 options: Once a firm has spent an amount equal to the breakpoint, it must begin issuing new common stock if it wants to continue funding capital investment. Once a firm has spent an amount equal to the breakpoint, it is out of retained earnings and consequently will fund any remaining investment with debt only. Once a firm has spent an amount equal to the breakpoint, it will switch from common stock to preferred stock for its capital investment funding needs.
22) Consider an investor who owns stock XYZ. The stock is currently trading at $120. The investor worries that the outlooks for the market and the stock are not 5 favorable. The investor decides to protect his potential losses by using derivatives. Which one is a correct course of action given the investor's concerns? 123) Assume the same investor decided to purchase a European call option on stock ABC. Further assume that the current price of the stock is $130. The investor paid $10 for the call with the strike price at $155. (A)If the stock price goes up to $160, what is the payoff to the investor? (B) Further assumes that the investor also decided to sell a European put option on the same underlying with the same strike price of $155 and option cost of $10. What is the payoff to the investor when the stock price moves to $175? Which of the following combination of answers best capture the payoffs for situations escribed in A and B?
Determine how a portfolio manager might use financial futures to hedge risk in each of the following circumstances:a. You own a large position in a relatively illiquid bond that you want to sell.b. You have a large gain on one of your Treasuries and want to sell it, but you would like to defer the gain until the next tax year.c. You will receive your annual bonus next month that you hope to invest in long-term corporate bonds. You believe that bonds today are selling at quite attractive yields, and you are concerned that bond prices will rise over the next few weeks.
financial risk management 1. The KLSE CI is at 1250. The value of your portfolio is RM2.5million. If you wish to hedge against a marketdownturn as completely as possible, do you buy or sell futures contract? 2. The buyer of the option is not obligated to complete the deal and will do so only if changes in price make it profitable to do so. ( True/ False)
An investor must decide between two alternative investments—stocks and bonds. The return for each investment, given two future economic conditions, is shown in the following payoff table: Economic Conditions Investment Good Bad Stocks $10,000 $- 4,000 Bonds 7,000 2,000 What probability for each economic condition would make the investor indifferent to the choice between stocks and bonds?
Chris Johnson has observed Kayangan Industries Berhad and Hartalega Holding Berhad share on the Bursa Malaysia Derivatives market. He is interested to invest in those shares, and he has proposed to the fund manager to analyze which investment should he invest. The information for those shares is as follows: 4. (i) Kayangan Industries is currently trading at RM55 per share and does not pay dividend with the volatility of 35 percent. The current risk-free rate of interest is 11 percent with a strike price of RM53 that expires in five months. (ii) Hartalega Holding has a share price at RM26.70 and it is expected to pay a dividend of RM0.80 per share in May 2021. The strike price is RM28.50. The risk-free interest rate is 15.3 percent per annum and the variance is 8.6 percent. The share will expire in 1 year 3 months. Based on the information above: (a) Calculate the value of call option for Kayangan Industries and put option for Hertalega Holding. (b) Chris Johnson fund managers has…
b. Assume tḥat you maintain bonds and money market securities in your portfolio and you suddenly believe that long-term interest rates will rise substantially tomorrow (even though the market does not share the same view), while short term interest rates will remain the same. i. How would you rebalance your portfolio between bonds and money market securities?
Which of the following is true concerning short sales of exchange-listed stocks? Question 6 options: You are likely to get a margin call when the stock price drops The potential loss from short selling is limited to the proceeds from the short sale Proceeds from the short sale must be kept on deposit with the broker until you close the position Short-sellers do not need to post margin

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