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I currently own a portfolio of stocks worth $10 million that has a beta of 1.2. It has perfect positive correlation with the S&P500 index. The risk-free rate is 3%, and the market risk premium for the S&P500 is 8%. The S&P500 is currently valued at 2500. The notional value of one contract is $250*S&P value. a) Calculate the one-year futures price on the S&P500 index. [2 Marks] b) If I want to own a risk-free bond instead of the index, explain how I can do this without selling my portfolio of stocks and purchasing bonds. Calculate the number of futures contracts I need to achieve this and specify if the contracts are long or short. [3 Marks] c) Suppose that instead of wanting to own a risk-free bond, I instead want to own the Russell 3000 index. Explain how I can do this without selling my portfolio of stocks that is correlated with the S&P500 and buying the Russell 3000 (HINT: futures are available on both the S&P500 and the Russell 3000). No calculations are required – simply explain the necessary steps. [5 Marks] I currently own a portfolio of stocks worth $10 million that has a beta of 1.2. It has perfect positive correlation with the S&P500 index. The risk-free rate is 3%, and the market risk premium for the S&P500 is 8%. The S&P500 is currently valued at 2500. The notional value of one contract is $250*S&P value. a) Calculate the one-year futures price on the S&P500 index. [2 Marks] b) If I want to own a risk-free bond instead of the index, explain how I can do this without selling my portfolio of stocks and purchasing bonds. Calculate the number of futures contracts I need to achieve this and specify if the contracts are long or short. [3 Marks] c) Suppose that instead of wanting to own a risk-free bond, I instead want to own the Russell 3000 index. Explain how I can do this without selling my portfolio of stocks that is correlated with the S&P500 and buying the Russell 3000 (HINT: futures are available on both the S&P500 and the Russell 3000). No calculations are required – simply explain the necessary steps. [5 Marks]
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1 Futures price of SP500 F S 1 r t F futures price S spot price r risk free rate t time assuming the... View the full answer
Related Book For
Financial management theory and practice
ISBN: 978-0324422696
12th Edition
Authors: Eugene F. Brigham and Michael C. Ehrhardt
Posted Date:
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