Magdolena Endowment Fund MEF, which supports the activities of the Magdolena Charitable Trust, is relatively new...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Magdolena Endowment Fund "MEF", which supports the activities of the Magdolena Charitable Trust, is relatively new and small in terms of assets under management. The trustees of the endowment have adopted a conservative investment strategy: at the current time, all of the $1 million in assets are equally invested in an S&P 500 Index tracking fund and U.S. Treasury bonds. Right now, the annual dividend yield on the S&P 500 Index fund is 3.0 percent, whereas the annual coupon rate is 4.0 percent for the T-bonds. As the fund manager, you expect that over the next three months the market will be very volatile. Given that the priority of the trustees is to preserve the value of the endowment fund, you are required to use various derivative strategies to protect the assets under management. The current level of S&P 500 is 1,000, and the price of U.S. T- bonds is 100. Assume that the current three-month T-bill rate is 1.2 percent. a. Using the derivative information listed below, discuss the details of two derivative strategies that could be employed to protect the endowment's current asset value. Contract size Current price Strike price Expiration S&P 500 Index $21 $ 1000 Call option Put option Future $ 50000 50000 250000 3 months later 3 months later 3 months later 18 1000 1007 U.S. Treasury Bonds $ 100000 3 months later $6 $ 100 Call option Put option Future 3 months later 6.5 100 100000 100000 3 months later 103 b. Applying the put-call parity relationship, which derivative strategy should you recommend and why? c. Briefly explain the details of derivative-based hedging strategies that can be applied in your field of work. What are the benefits and potential risk factors for undertaking such strategies in lieu of direct cash-oriented investments? Magdolena Endowment Fund "MEF", which supports the activities of the Magdolena Charitable Trust, is relatively new and small in terms of assets under management. The trustees of the endowment have adopted a conservative investment strategy: at the current time, all of the $1 million in assets are equally invested in an S&P 500 Index tracking fund and U.S. Treasury bonds. Right now, the annual dividend yield on the S&P 500 Index fund is 3.0 percent, whereas the annual coupon rate is 4.0 percent for the T-bonds. As the fund manager, you expect that over the next three months the market will be very volatile. Given that the priority of the trustees is to preserve the value of the endowment fund, you are required to use various derivative strategies to protect the assets under management. The current level of S&P 500 is 1,000, and the price of U.S. T- bonds is 100. Assume that the current three-month T-bill rate is 1.2 percent. a. Using the derivative information listed below, discuss the details of two derivative strategies that could be employed to protect the endowment's current asset value. Contract size Current price Strike price Expiration S&P 500 Index $21 $ 1000 Call option Put option Future $ 50000 50000 250000 3 months later 3 months later 3 months later 18 1000 1007 U.S. Treasury Bonds $ 100000 3 months later $6 $ 100 Call option Put option Future 3 months later 6.5 100 100000 100000 3 months later 103 b. Applying the put-call parity relationship, which derivative strategy should you recommend and why? c. Briefly explain the details of derivative-based hedging strategies that can be applied in your field of work. What are the benefits and potential risk factors for undertaking such strategies in lieu of direct cash-oriented investments?
Expert Answer:
Answer rating: 100% (QA)
a 1 Short Put Option Strategy The Endowment could sell put options with a strike price of 1000 on th... View the full answer
Related Book For
Investment Analysis and Portfolio Management
ISBN: 978-0538482387
10th Edition
Authors: Frank K. Reilly, Keith C. Brown
Posted Date:
Students also viewed these accounting questions
-
Dosley Endowment Fund, which supports the activities of the Dosley Charitable Trust, is relatively new and small in terms of assets under management. The trustees of the endowment have adopted a...
-
A large charitable endowment fund constructed a fixed-income portfolio at the time it was established and has kept its allocation unchanged over the years. While the charitable founder asks you...
-
A two-year bond with par value $1,000 making annual coupon payments of $93 is priced at $1,000. a. What is the yield to maturity of the bond? (Round your answer to 1 decimal place.) b.What will be...
-
Secondary xylem and phloem in dicot stem are produced by (a) Phellogen (b) Apical meristems (c) Axillary meristems (d) Vascular cambium
-
Consider the pipeline depiction in Figure 12.13b, which is redrawn in Figure 17.25a, with the fetch and decode stages ignored, to represent the execution of thread A. Figure 17.25b illustrates the...
-
Cellular ability to regulate homeostasis is measured by basal Ca pump activity. Deregulation of calcium homeostasis can trigger serious effects of cell functioning. Can maternal mercury exposure...
-
What is the difference between real objects and virtual objects? Give an example for each.
-
The overall average on a process you are attempting to monitor is 50 units. The process standard deviation is 1.72. Determine the upper and lower control limits for a mean chart, if you choose to use...
-
Soarch Fila Home Insert Draw Design Transitions Animations Slide Show Record Review View Help Layout R New AAA E-E-3 JUS+AV Ax LA OOO\\ ALLOCG Record Share Shape F- Ind Stace Ouding Aange Cuck...
-
Given the bill of materials for the printer cartridge (A) shown below, a gross requirement to build 200 units of A, on-hand inventory levels for each item as shown in the table below, and assuming...
-
Identify the Impact and factors that may affect the success and failure of a business in the manufacturing industry in relation to business analytics.
-
An asset was purchased for $262000. It had an estimated salvage value of $52000 and an estimated useful life of 10 years. After 5 years of use, the estimated salvage value is revised to $40000 but...
-
A pair of meshing spur gears with pressure angles (0) of 20 and a module (m) of 2. The pinion has 20 teeth (72) and the gear has 40 teeth (T3). Determine center distance (C) of the two gears. When...
-
You have taken a management position in Ocean Cuisines plc that just went public last year. The company's restaurants specialize in seafood dishes. A concern you had was that the restaurant business...
-
A fruit company packages its fruit into two types of boxes: large and small. This morning, the company made two deliveries. The table below shows the number of boxes in each delivery and the total...
-
Current ratio = 2 . 2 times Credit sales = $ 8 7 6 m Average collection period = 5 0 days Inventory turnover = 1 . 2 0 times Total asset turnover = 0 . 6 0 times Debt ratio = 6 0 % Use the above...
-
Compute the following determinant using cofactor expansion for the 4 x4 pick the method of your choice for the 3 x 3 matrices. Hint: choose along w column carefully. 12-12 5031 2-1-20 102-2
-
In each of the following independent cases, document the system using whatever technique(s) your instructor specifies. a. Dreambox Creations (www.dreamboxcreations.com/) in Diamond Bar, California,...
-
Draw a properly labeled graph of the Markowitz efficient frontier. Describe the efficient frontier in exact terms. Discuss the concept of dominant portfolios, and show an example of one on your graph.
-
You are considering acquiring shares of common stock in the Madison Beer Corporation. Your rate of return expectations are as follows: MADISON BEER CORP. Possible Rate of Return Probability 0.10...
-
Discuss three strategies active managers can use to add value to their portfolios.
-
A construction engineer has to inspect 5 construction sites in a 2-day inspection schedule. He may or may not be able to visit these sites in two days. He will not visit any site more than once. (a)...
-
An explosion in an LNG storage tank in the process of being repaired could have occurred as the result of static electricity, malfunctioning electrical equipment, an open flame in contact with the...
-
What conditions for the binomial distribution, if any, fail to hold in the following situations? (a) For each of a company's eight production facilities, record whether or not there was an accident...
Study smarter with the SolutionInn App