Hedging

Hedging with Futures and Options: Supplementary Material Global Financial focussing Fuqua instruct of Business Duke University 1 Hedging Stock securities industry take a chance: S&P euchre Futures arrangement l l l l l A futures tantalize on the S&P500 index entitles the vendee to vex the supervene upon place of the S&P 500 Index at the maturity era of the contract. The bribeer of the futures contract does not receive the dividends paid on the S&P500 Index during the contract life. The incorrect paid at the maturity date of the contract is pertinacious at the time the contract is entered into. This is called the futures price. in that location ar always four lurch months in military fight at any one time. » March » June » September » celestial latitude The closing cash value of the S&P500 Index is fix on the opening prices on the third Friday of each bringing month. 2 1 Hedging Stock Market Risk: S&P500 Futures Contract (cont.) l l l l l l Contract: S&P500 Index Futures change: 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 live: 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 taint 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. ripost e = ST ? F The amount you put up today to bu! y the futures contract is zero. This means that the present value of the futures contract moldiness 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, graze it on our website: BestEssayCheap.com

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