You are now in year 2028 as a fund manager. One of your high net worth...
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You are now in year 2028 as a fund manager. One of your high net worth clients, Mr Ho, informed you that he just found out that he will be receiving an inheritance of $1.5 million in cash, which the lawyers will be able to pass over to him in 3 months' time. Mr Ho intends to pass over the $1.5 million cash to invest in a portfolio of shares that will be able to track the movements of Singapore's Straits Times Index (STI). However, he noted that the Singapore stock market has been rising strongly and he fears that stock prices will be much higher when he is able to hand over his cash to you to purchase the stocks. You have recommended a long hedge strategy in STI futures. Relevant data are as follows: Current month 3 months later (Feb) (May) 3,200 3,010 3,190 3,030 STI (Spot) SGX STI May Futures Note that the standardised size of each STI futures contract is SGD 10 per index point. a) How many STI futures contracts is required for the long hedge strategy? b) Determine the net result of the hedge at the end of 3 months (i.e. May): c) An alternative to using STI futures for hedging is to use options on the STI index. Discuss: i) ii) The correct options strategy that should be employed if options hedging was chosen instead. Five (5) differences between using options instead of futures to carry out the hedging strategy. You are now in year 2028 as a fund manager. One of your high net worth clients, Mr Ho, informed you that he just found out that he will be receiving an inheritance of $1.5 million in cash, which the lawyers will be able to pass over to him in 3 months' time. Mr Ho intends to pass over the $1.5 million cash to invest in a portfolio of shares that will be able to track the movements of Singapore's Straits Times Index (STI). However, he noted that the Singapore stock market has been rising strongly and he fears that stock prices will be much higher when he is able to hand over his cash to you to purchase the stocks. You have recommended a long hedge strategy in STI futures. Relevant data are as follows: Current month 3 months later (Feb) (May) 3,200 3,010 3,190 3,030 STI (Spot) SGX STI May Futures Note that the standardised size of each STI futures contract is SGD 10 per index point. a) How many STI futures contracts is required for the long hedge strategy? b) Determine the net result of the hedge at the end of 3 months (i.e. May): c) An alternative to using STI futures for hedging is to use options on the STI index. Discuss: i) ii) The correct options strategy that should be employed if options hedging was chosen instead. Five (5) differences between using options instead of futures to carry out the hedging strategy.
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SOLUTION a To determine the number of STI futures contracts required for the long hedge strategy we need to calculate the notional amount of the portf... View the full answer
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