b. Assume that S&P; MidCap 400 futures contracts are priced at $500 X the index

Question

b. Assume that S&P; MidCap 400 futures contracts are priced at $500 X the index and are currently being quoted at 769.40. How many contracts wou1d the Pernellis is have to buy (or sell) to set up the hedge? 1. Say the value of the Pernelli portfolio dropped 12% over the course of the market retreat. To what price must the stock-index futures contract move in order to cover that loss? 2. Given that a $16,875 margin deposit is required to buy or sell a single S&P; 400 future contract, what would be the Pernellis return On invested capital if the price of the futures contract changed by the amount computed in question bi? C. Assume that the value of the Pernelli portfolio declined by $52,000 while the price of an S&p; 400 futures contract moved from 769.40 to 691.40. (Assume that Jim and Polly short-sold one futures contract to set up the hedge.) 1. Add the profit from the hedge transaction to the new (depreciated) value of the stock portfolio. How does this amount compare to the $375,000 portfolio that existed just before the market started its retreat? 2. Why did the stock-index futures hedge fail to give complete protection to the Pernelli portfol Is it possible to obtain perfect (dollar-for-dollar) protection from these types of hedges? Expl d. The Pernellis might decide to set up the hedge by using futures options instead of contracts. Fortunately, such options are available on the S&P; MidCap 400 Index. The options, like their underlying futures contracts, are also valued/priced at $500 times lying S&P; 400 Index. Now, suppose a put on th

Explanation / Answer

The reason for the hedge is to protect the capital invested in the stock portfolio

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