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An investment manager has a client who would like to temporarily reduce exposure to equities by converting a $25 million equity position to cash for a period of four months. The client would like to do this without liquidating the equity position, so equity futures are one appropriate tool. The futures contract is priced at 1170.1 with a multiplier of $250 and expires in four months. The dividend yield on the underlying index is 1.25%, and the risk-free rate is 2.75%.

A. Calculate the number of futures contracts required to synthesize the cash, and state whether it will be a long or short position.

B. Determine the effective amount of money committed to the transaction.

C. Assume that the stock index is at 1031 when the futures contract expires. At expiration, what is the total value of the futures and stock position?

NO EXCEL. PLEASE YOUR WORK IN DETAIL

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Financial Management, Finance

Category:- Financial Management
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