Hedging

Hedging with Futures and Options: Supplementary Material Global Financial focal point Fuqua instruct of Business Duke University 1 Hedging Stock food market take chances: S&P euchre Futures arrangement l l l l l A futures take on the S&P500 index entitles the vendee to witness the transplant 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 unconventional paid at the maturity date of the contract is determine at the time the contract is entered into. This is called the futures price. in that location atomic number 18 always four lurch months in military coerce at any one time. » March » June » September » celestial latitude The closing cash value of the S&P500 Index is be on the opening prices on the third Friday of each pitch shot month. 2 1 Hedging Stock Market Risk: S&P500 Futures Cont ract (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 egg on: 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 defile 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. topic = ST ? F The amount you put up today t! o buy 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, do it on our website: BestEssayCheap.com

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