Suppose you purchased 500 shares of the Fidelity Nasdaq Composite Index Tracking

Question

Suppose you purchased 500 shares of the Fidelity Nasdaq Composite Index Tracking Stock (ticker = ONEQ) on January 1 at $50 each. On March 1 the price reached $60, and you became nervous at having earned a large return in two months.

Rather than sell your shares, you decide to hedge by selling June E-mini NASDAQ composite futures contracts (multiplier = 20), which settled at 1,508 on March 1. Since the tracking stock and futures are on the same asset, the beta is 1 and the hedge ratio is: HR = INT(((500*60) / (20*1,508))*1) = 1

When the contract settles in June, the ONEQ shares are selling for $45 and the futures for 1,105.

Explanation / Answer

Decline in the Value of ONEQ Shares = 500*(60 - 45) = 7500

Gain on the Contracts Taken to Hedge the Position = 20*(1508 - 1105) = 8060

Since the contracts have been sold earlier at a higher price (1508), we can purchase those contracts at a lower price (1105) now.

Net Gain that will be realized would be = 8060 - 7500 = $ 560.

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