The current price of a share of company z which does not pay dividends is $48.25. Your
Question:
The current price of a share of company z which does not pay dividends is $48.25. Your position worth $38,600 consists entirely of Company Z shares. The 3 month spot interest rate is 6% APR. The futures contract on Company Z's stocks (1 stock per contract) with a 3 month maturity, is trading at fair value ( there is no arbitrage opportunity). To protect your position against potential losses you decide to partially hedge by selling 700 futures on company z that mature in 3 months. You have built a return model, according to which the 3 month net return on company z's stock should be between -15% and 20%. What is the lowest possible value of your portfolio (stocks and futures) in 3 months based on your model ?
Fundamentals of corporate finance
ISBN: 978-0470876442
2nd Edition
Authors: Robert Parrino, David S. Kidwell, Thomas W. Bates