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Tutorial 10

The document discusses various aspects of futures markets, including the absence of a futures market in cement and reasons for purchasing futures contracts over underlying assets. It poses several true/false statements regarding futures pricing related to dividend yields and beta, and includes calculations for futures prices based on interest rates and stock values. Additionally, it explores arbitrage strategies and risk hedging techniques using financial futures in different investment scenarios.

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Ngoc Linh Cao
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2 views

Tutorial 10

The document discusses various aspects of futures markets, including the absence of a futures market in cement and reasons for purchasing futures contracts over underlying assets. It poses several true/false statements regarding futures pricing related to dividend yields and beta, and includes calculations for futures prices based on interest rates and stock values. Additionally, it explores arbitrage strategies and risk hedging techniques using financial futures in different investment scenarios.

Uploaded by

Ngoc Linh Cao
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Investment and Portfolio Management

TOPIC 10 – TUTORIAL 10

1. Why is there no futures market in cement?


2. Why might individuals purchase futures contracts rather than the underlying asset?
3. Are the following statements true or false? Why?

a. All else equal, the futures price on a stock index with a high dividend yield should be higher
than the futures price on an index with a low dividend yield.

b. All else equal, the futures price on a high-beta stock should be higher than the futures price
on a low-beta stock.

c. The beta of a short position in the S&P 500 futures contract is negative.

4. Figure 22.1

a. Turn to the Mini-S&P 500 contract in Figure 22.1. If the margin requirement is 10% of the
futures price times the contract multiplier of $50, how much must you deposit with your
broker to trade the September maturity contract?
b. If the September futures price were to increase to 2,090, what percentage return would you
earn on your net investment if you entered the long side of the contract at the price shown
in the figure?
c. If the September futures price falls by 1%, what is your percentage return?

5.

a. A single-stock futures contract on a non-dividend-paying stock with current price $150 has
a maturity of 1 year. If the T-bill rate is 3%, what should the futures price be?
b. What should the futures price be if the maturity of the contract is 3 years?
c. What if the interest rate is 6% and the maturity of the contract is 3 years?
Investment and Portfolio Management

6. Suppose the value of the S&P 500 stock index is currently 2,000.

a. If the 1-year T-bill rate is 3% and the expected dividend yield on the S&P 500 is 2%, what
should the 1-year maturity futures price be?

b. What if the T-bill rate is less than the dividend yield, for example, 1%?

7. OneChicago has just introduced a single-stock futures contract on Brandex stock, a company
that currently pays no dividends. Each contract calls for delivery of 1,000 shares of stock in 1
year. The T-bill rate is 6% per year.

a. If Brandex stock now sells at $120 per share, what should the futures price be?

b. If the Brandex price drops by 3%, what will be the change in the futures price and the change
in the investor’s margin account?

c. If the margin on the contract is $12,000, what is the percentage return on the investor’s position?

8. The multiplier for a futures contract on a stock market index is $50. The maturity of the contract
is 1 year, the current level of the index is 1,800, and the risk-free interest rate is .5% per month.
The dividend yield on the index is .2% per month. Suppose that after 1 month, the stock index
is at 1,820.

a. Find the cash flow from the mark-to-market proceeds on the contract. Assume that the parity
condition always holds exactly.

b. Find the holding-period return if the initial margin on the contract is $5,000.
Investment and Portfolio Management

9. The S&P portfolio pays a dividend yield of 1% annually. Its current value is 2,000. The T-bill
rate is 4%. Suppose the S&P futures price for delivery in 1 year is 2,050. Construct an arbitrage
strategy to exploit the mispricing and show that your profits 1 year hence will equal the
mispricing in the futures market.

Extra Exercises:

1. What is the difference in cash flow between short-selling an asset and entering a short futures
position?

2. Determine how a portfolio manager might use financial futures to hedge risk in each of the fol-
lowing circumstances:

a. You own a large position in a relatively illiquid bond that you want to sell.

b. You have a large gain on one of your Treasuries and want to sell it, but you would like to

defer the gain until the next tax year.

c. You will receive your annual bonus next month that you hope to invest in long-term corpo-

rate bonds. You believe that bonds today are selling at quite attractive yields, and you are

concerned that bond prices will rise over the next few weeks.

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