Jack Smith manages a portfolio of Australian shares with a current market value of $1,510,000. The...

 

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Jack Smith manages a portfolio of Australian shares with a current market value of $1,510,000. The portfolio is to be sold in December 2020. The ASX/SPI 200 Futures for December 2020 delivery is 5,365 today. In December, the portfolio can be cashed out (sold) for $1,444,450 and on the same day the ASX/SPI 200 futures price is 5,160. (A) How many contracts of the ASX/SPI 200 futures contract would you use to hedge your potential loss in the portfolio? (Remember 1 point of the ASX/SPI 200 = $25). Would you be long or short in the ASX/SPI 200 futures contracts? Show all the workings. (B) Construct the hedge and indicate what you would do now and what will happen in December when you need to sell your portfolio. Show the net valuation effect. Jack Smith manages a portfolio of Australian shares with a current market value of $1,510,000. The portfolio is to be sold in December 2020. The ASX/SPI 200 Futures for December 2020 delivery is 5,365 today. In December, the portfolio can be cashed out (sold) for $1,444,450 and on the same day the ASX/SPI 200 futures price is 5,160. (A) How many contracts of the ASX/SPI 200 futures contract would you use to hedge your potential loss in the portfolio? (Remember 1 point of the ASX/SPI 200 = $25). Would you be long or short in the ASX/SPI 200 futures contracts? Show all the workings. (B) Construct the hedge and indicate what you would do now and what will happen in December when you need to sell your portfolio. Show the net valuation effect.

Answer rating: 100% (QA)

A To hedge the potential loss in the portfolio we w... View the full answer