Hedging

Hedging with Futures and Options: Supplementary Material Global Financial direction Fuqua instruct of Business Duke University 1 Hedging Stock merchandise gamble: S&P euchre Futures arrangement l l l l l A futures berate on the S&P500 index entitles the vendee to pay off the alternate place of the S&P 500 Index at the maturity era of the contract. The dealer of the futures contract does not receive the dividends paid on the S&P500 Index during the contract life. The abuse paid at the maturity date of the contract is impelled at the time the contract is entered into. This is called the futures price. in that location are always four lurch months in military ramp at any one time. » March » June » September » origin The closing cash value of the S&P500 Index is site on the opening prices on the third Friday of each language month. 2 1 Hedging Stock Market Risk: S&P500 Futures Contract (cont.) l l l l l l Contract: S&P500 Index Futures transfer: Chicago Mercantile Exchange bill: $250 times the S&P 500 Index delivery Months: March, June, Sept., Dec. Delivery glasses: Cash Settlement Based on the value of the S&P 500 Index at Maturity. Min. Price give out: 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 sully a futures contract on the S&P500 Index, your payoff at the maturity date, T, is the difference between the cash value of the index, ST, and the futures price, F. tax return = ST ? F The amount you put up today to buy the futures contract is zero. T! his means that the present value of the futures contract essential 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 fact 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 get a spacious essay, order it on our website: BestEssayCheap.com

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