Not long ago, Vanessa Woods sold her company for several million dollars (after taxes) She took some of that money and put it into the stock market Today Vanessas portfolio of blue chip stocks is worth $3 8 million Vanessa wants to keep her portfolio intact, but shes concerned about a developing we...

a Since Vanessas portfolio consists of blue chip stocks x stocks of major wellestablished companies ...

Not long ago, Vanessa Woods sold her company for several million dollars (after taxes). She took some

Question:

Not long ago, Vanessa Woods sold her company for several million dollars (after taxes).
She took some of that money and put it into the stock market. Today Vanessa’s of blue-chip is worth $3.8 million. Vanessa wants to keep her intact, but she’s concerned about a developing weakness in the market for blue chips. She decides, therefore, to hedge her position with 6-month futures contracts on the Dow Jones Industrial Average, which are currently trading at 11,960.
a. Why would she choose to hedge her with the DJIA rather than the S&P 500?
b. Given that Vanessa wants to cover the full $3.8 million in her describe how she would go about setting up this hedge.
c. If each contract required a margin deposit of $4,875, how much money would she need to set up this hedge?
d. Assume that over the next 6 months, stock prices do fall and the value of Vanessa’s drops to $3.3 million. If DJIA futures contracts are trading at 10,400, how much will she make (or lose) on the futures hedge? Is it enough to offset the loss in her That is, what is her net profit or loss on the hedge?
e. Will she now get her margin deposit back, or is that a “sunk cost”—gone forever?
Stocks
Stocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...