The S&P/ASX 200 index is currently at 4000. You manage a $4 million indexed equi

Question

The S&P/ASX 200 index is currently at 4000. You manage a $4 million indexed equity portfolio. The S&P/ASX 200 futures contract has a multiplier of $25.

a)      If you are temporarily bearish on the stock market, how many contracts should you sell to fully eliminate your exposure over the next six months?

(1 mark)

b)      If government pay 2% per six months and the semi-annual dividend yield is 1%, what is the parity value of the futures price? Show that if the contract is fairly priced, the total risk-free proceeds on the hedged strategy in part (a) provide a return equal to the government bond rate.

(1 mark)

Explanation / Answer

month Swiss rate...[e^(0.00025*(3/12)] - 1 = 0.00063

Note that at the current spot rate, if 1SF = $1.0404, then one SF costs 1/1.0404 = $0.96117
The three month forward gives you 1SF = $1.03, so one SF costs 1/1.03 = $0.97087
So you want to sell the SFs in the future and buy them now, in order to make a profit. Or, conversely, buy the dollar now, and sell it in the future.

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