As the CEO of Sacker Ug Geos (ticker symbol: SUG) you decide to sell 100,000 shares in
Question:
As the CEO of Sacker Ug Geos (ticker symbol: SUG) you decide to sell 100,000 shares in a
secondary offering to raise additional capital for an expansion. Your shares currently trade at
$100/share and have a beta of 1.25. It will take several weeks to complete the registration process
through the SEC and you worry that the overall stock market will fall in the interim. So you decide to
hedge the stock sale by selling Emini S&P 500 futures. The futures index is at 4950 and has a beta
of 1.0.
Current price of SUG: $100.00/share
Emini S&P 500 futures: 4950
Five weeks later you issue the shares and simultaneously cover your hedge position. Prices then are:
Price of SUG: $107.50/share
Emini S&P 500 futures: 4,981
- What is the anticipated transaction?
- What can be done to hedge this risk? (buy/sell? buy/sell what? how much?)
- How much the does the firm pay/receive when it carries out the anticipated transaction?
- What does it do to offset the hedge position (what does is buy/sell? How much? At what price?) Did the hedge transaction produce a profit or a loss, and how much?
- Considering the result of the anticipated transaction and the hedge, what is the effective receipts from selling shares and the effective price per share of the overall transaction? (show computation in cells)
USE EXCEL FUNCTIONS
answer each part and label each part to coincide.