Alex is the fund manager of a Hong Kong equities fund. Thanks to the recent bullish performance
Question:
Alex is the fund manager of a Hong Kong equities fund. Thanks to the recent bullish performance of the local stock market, the market value of his equity fund portfolio has reached HKD360 million. As a shrewd and prudent fund manager, John starts to worry that this stock market heyday will not last long. Suppose today is 1 June 2015 and according to John's analysis, the market correction will happen in the next month. He is now considering using September 2015 Hang Seng Index futures to hedge the risk exposure of his equity fund. Further market information is shown as follow, ignoring transaction costs:
1 June 2015:
Closing (1june2015) 29,800
September contract price 30,000
Contract Multiplier HKD 50 per index point
Margin requirement HKD 91,850 per HSI futures contract
Suppose 40days later(10 July 2015), the market is adjusted as Alex has predicted. The settlement price of the September 2015 HSI futures is 28,800 on that day. Evaluate Alex's gain or loss in his futures position and elaborate how Alex hedging works is.