The S&P 500 Index is currently at 2,000. You manage a $21 million indexed equity
ID: 2789887 • Letter: T
Question
The S&P 500 Index is currently at 2,000. You manage a $21 million indexed equity portfolio. The S&P 500 futures contract has a multiplier of $250.
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?
Number of contracts
b. If T-bills pay 2.0% per six months and the semiannual dividend yield is 1.8%, what is the parity value of the futures price? (Round your answer to 2 decimal places. Do not round intermediate calculations.)
Parity value
Explanation / Answer
Number of contract = [Fund Value / (Current level of S&P × Multiplier)]
= [$21,000,000 / (2,000 × $250)]
= $21,000,000 / $500,000
= 42
NUmber of contract is 42.
b.
Parity Value = Current Level of S&P × (1 + T bill rate - Semiannual Dividend yield)
= 2,000 × (1 + 2% - 1.80%)
= 2,000 × (1 + 0.20%)
= 2,004.
Parity value of S&P after 6 month will be 2,004.
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