Essay About Market Index Futures Price And Coffee Manufacturer Plans

Fn 307 Question Answers
Essay Preview: Fn 307 Question Answers
Report this essay
FN307 Derivatives 1, Tutorial #2Consider a portfolio consisting of $50000 of IBM shares and $40000 of Apple shares.  Apples shares have a market index beta of 1.2 whereas IBM shares have a market index beta of 1.1.  The market index futures price is $150.00 and the index futures contract is for 10 times the index. What is the risk-minimizing hedge for this portfolio using futures on the market index to hedge? Write the answer in terms of the (fractional) number of contracts.amountweightbetaibm500000.5555561.1apple400000.4444441.2total9000011.144444units per contract10future price150contracts68.66667shortIt is July 1st. A coffee manufacturer plans to purchase 600,000 pounds of coffee in 30 days.  In order to partially hedge its risk, it goes long 15 coffee futures contracts for delivery in three months (futures delivery date is October 1st).  Each coffee futures contract is for delivery of 37,500 pounds.  On July 1st the spot price of coffee is $1.30 per pound and the futures price is $1.32 per pound.  On July 31st the spot price of coffee is $1.24 per pound and the futures price is $1.25 per pound.  What is the coffee manufacturers effective purchase price for coffee?units per contract37500number of contracts15final futures price1.25initial futures price1.32spot price on termination date1.24number of units of actual600000cash purchase744000hedging profit-39375effective purchase price1.305625Consider a portfolio consisting of two stocks, 70% invested in IBM Inc. shares and 30% invested in Apple Inc. shares.  IBM shares have a per-annum return standard deviation of 35% whereas Apple Inc. shares have a per-annum return standard deviation of 20%; the correlation between the two returns is .35.  What is the per-annum standard deviation of the portfolio’s return? amountweightstand devcorrelationvarianceibm7000000.70.350.35apple3000000.30.20.2718730.073915A trader has a short position of 450 contracts in the FTSE futures contract.  Each contract is for £10 times the index.  If the index futures price increases from 1175 to 1185 over the course of a trading day (close to close) what is the daily mark-to-market cash settlement on the trader’s position?number of contracts450units per contract10initial futures price1175closing futures price1185daily settlement-45000