An investor currently has $50M in the Alibaba stock and $50M in one-year zero-coupon bonds. Assume that the one-year interest rate is 8% (annually compounding). Assume that the current quote on the Alibaba stock is 1,250, each futures contract is written on 200 shares of the Alibaba stock and the dividend yield on the stock is approximately 3% per year, i.e., $1,000 invested in the stock yields $30 in dividends at the end of the year.

(a) Suppose you invest $1,250×200 in one-year zero-coupon bonds and at the same time enter into a single futures contract with long position on the Alibaba with one year to maturity. Assume that in one year the stock ?nishes at 1,100. What is the total value of your position?  How does this compare with buying 200 shares of the stock and holding them for a year?

(b) If this investor decides to switch to a 70/30 stock/bond mix for a period of one year, how would he/she implement this strategy using the Alibaba futures?  How many contracts with one year to maturity would you need?

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