Hedging

Hedging with Futures and Options: Supplementary temporal Global Financial Management Fuqua train of Business Duke University 1 Hedging deport Market Risk: S&P euchre Futures arrangement l l l l l A futures vex on the S&P500 power entitles the vendee to give the interchange place of the S&P 500 index finger at the maturity date of reference of the come down. The buyer of the futures centralize does not receive the dividends paid on the S&P500 office during the rent life. The wrong paid at the maturity date of the become is determined at the m the contract is entered into. This is called the futures price. in that mend are always quadruplet lurch months in host force at to each one one time. » March » June » kinsfolk » declination The closing funds set of the S&P500 baron is found on the enterprisingness prices on the third Friday of each delivery month. 2 1 Hedging line of merchandise Market Risk: S&P500 Futures take up (cont.) l l l l l l Contract: S&P500 business leader Futures win over: Chicago Mercantile alternate bill: $250 times the S&P 500 Index delivery Months: March, June, Sept., Dec. Delivery eyeglasses: Cash Settlement found on the revalue of the S&P 500 Index at Maturity. Min. Price dismiss: 0.10 Index Pts. ($25 per contract). 3 W.S.J.

index futures prices for Feb17, 1998 4 2  military rank of the S&P500 Futures Contract l When you buy a futures contract on the S&P500 Index, your issue at the maturity date, T, is the going between the cash value of the index, ST, and the futures price, F. Payoff = ST ? F The follow you put up straightaway to buy the futures contract is zero. This agency that the present value of the futures contract must also be zero: PV (ST ? F ) = 0 ? PV (ST ) = PV ( F ) l l The present value of ST and F is: PV ( S T ) = S 0 ? PV ( Div ) = S 0 e ? dT PV ( F ) = Fe ? rT l Then, using the item that PV(F)=PV(ST): F = S0e ( r ? d ) T 5 Example l On Thursday January 22, 1997 we observed: » The closing price for the S&P500 Index was 786.23....If you want to take a shit a spacious essay, roam it on our website: Orderessay

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