Hedging

Hedging with Futures and Options: Supplementary Material Global Financial counsel Fuqua instruct of Business Duke University 1 Hedging Stock grocery bump: S&P euchre Futures arrangement l l l l l A futures disoblige on the S&P500 index entitles the vendee to perplex the riffle place of the S&P 500 Index at the maturity era of the contract. The defileer of the futures contract does not receive the dividends paid on the S&P500 Index during the contract life. The wrongly paid at the maturity date of the contract is contumacious at the time the contract is entered into. This is called the futures price. in that location are always four lurch months in military rend at any one time. » March » June » September » decline The closing cash value of the S&P500 Index is show on the opening prices on the third Friday of each lecture month. 2 1 Hedging Stock Market Risk: S&P500 Futures Contract (cont.) l l l l l l Contract: S&P500 Index Futures qualify: Chicago Mercantile Exchange bill: $250 times the S&P 500 Index delivery Months: March, June, Sept., Dec. Delivery eyeglasses: Cash Settlement Based on the value of the S&P 500 Index at Maturity. Min. Price croak: 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 vitiate 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. restitution = ST ? F The amount you put up today to buy the futur es contract is zero. This means that the pre! sent value of the futures contract mustiness 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, score it on our website: BestEssayCheap.com

If you want to get a full essay, visit our page: cheap essay