The portfolio manager of a $1billion superannuation fund currently invested $490 million in the equity market index and $490 million in the short term government bond, the remaining is cash kept in the fund. He thinks that in the short future, there will be a stimulus policy by the government which will stimulate the stock market. He wants to take advantage of the policy and make adjustment to the fund's investment accordingly.

Refer to the following derivatives, (i) what position should he take to achieve his investment goal? (ii) what is the cost of setting up this position? (iii) what are the risk in the position?

(a) Futures contracts 

(b) Options 

Apart from taking advantage of the government policy, the portfolio manager would also like to include some real assets into the portfolio. He is considering to invest in real estate investment trust (REIT).

(c) Discuss how REIT can help his portfolio. 

Answer rating: 100% (QA)

a Futures contracts To take advantage of the expected stock market increase the portfolio manager could buy futures contracts on the equity market ind... View the full answer