Short Answer/Problem
1. Attach a Wall Street Journal clipping showing OEX prices. Explain how a person could use an index option like the S&P 100 (OEX) option to provide insurance against the decline of their 250,000 stock portfolio. Use the WSJ clipping to give a specific example.
2. Attach a Wall Street Journal clipping showing SPX futures prices. A portfolio manager controls $3 million in common stock. In anticipation of a stock market decline, the decision is made to hedge the portfolio using the September S&P 500 index futures contract. The portfolio beta is 1.15. Refer to the WSJ clipping for the current value of the index and the futures contracts.
a. Calculate the number of contracts that should be bought or sold (indicate which) to hedge this portfolio.
b. Suppose that when the contracts are closed out, the portfolio has fallen in value by $350,000 and the value of the S&P 500 index is 250.00. Calculate the combined gain or loss (indicate which) on the hedged portfolio.