1. You have been assigned to implement a three-month hedge for a stock mutual fund portfolio that primarily invests in medium-sized companies. The mutual fund has a beta of 1.49 measured relative to the S&P Midcap 400, and the net asset value of the fund is $189 million. Should you be long or short in the Midcap 400 futures contracts? Assuming the Midcap 400 Index is at 650 and its futures contract size is 500 times the index, determine the appropriate number of contracts to use in designing your cross-hedge strategy.
2. Suppose the 180-day S&P 500 futures price is 1,168.44, while the cash price is 1,157.31. What is the implied difference between the risk-free interest rate and the dividend yield on the S&P 500?
3. You are in a situation where the initial margin on heating oil futures is $8,400, the maintenance margin is $7,200 per contract, and you establish a long position of 10 contracts on this day. Each contract covers 42,000 gallons. If the contract settles down $.04 from yesterdays close, are you going to get a margin call? What is the maximum price decline that can be sustained before a margin call is issued?