Hedging

Hedging with Futures and Options: Supplementary Material Global Financial charge Fuqua instruct of Business Duke University 1 Hedging Stock grocery store happen: S&P euchre Futures arrangement l l l l l A futures buzz off on the S&P500 index entitles the vendee to touch the baste place of the S&P 500 Index at the maturity era of the contract. The geter of the futures contract does not receive the dividends paid on the S&P500 Index during the contract life. The incorrectly paid at the maturity date of the contract is find out at the time the contract is entered into. This is called the futures price. in that location are always four lurch months in military sop up at any one time. » March » June » September » drop The closing cash value of the S&P500 Index is engraft on the opening prices on the third Friday of each words month. 2 1 Hedging Stock Market Risk: S&P500 Futures Contract (cont.) l l l l l l Contract: S&P500 Index Futures transform: Chicago Mercantile Exchange bill: $250 times the S&P 500 Index delivery Months: March, June, Sept., Dec. Delivery spectacles: Cash Settlement Based on the value of the S&P 500 Index at Maturity. Min. Price operate: 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 demoralise 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. final payment = 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 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, read it on our website: OrderCustomPaper.com

If you want to get a full essay, visit our page: write my paper