36UIUC%20FIN%20300%20Stock%20Index%20Futures%20Hedge%20Ratio%20%28Answers%29%20FA%2010%20SP10%20v3.1

36UIUC%20FIN%20300%20Stock%20Index%20Futures%20Hedge%20Ratio%20%28Answers%29%20FA%2010%20SP10%20v3.1

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
UNIVERSITY OF ILLINOIS College of Business - Department of Finance - Finance 300 (Financial Markets) Professor James Jackson (Long) Cash Portfolio Profit & Loss and Stock Index Futures (Short) Hedge Ratios The portfolio manager (hedger) is willing to lock in a fixed sale price now (P t ) in order to avoid the risk of selling at lower market prices in the future (-P t+1 ) and to reduce the systematic risk of the cash portfolio. So, the portfolio manager initiates a short position in the futures market today, while the speculator initiates a long position in the futures market at P t . Thus, if the market price falls in the future, money is transferred from the speculator to the portfolio manager that will offset the portfolio manager’s business loss equal to the difference between (-P t+1 and P t ) * # futures contracts. This transaction transfers the price risk and the systematic risk from the portfolio manager to the speculator. The number of futures contracts is determined by the desired Beta level. Market Price Risks Include: Price Risk and/or Volatility Risk ( β or σ ). S&P 500 Futures Contract Value
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/10/2011 for the course FIN 300 taught by Professor Staff during the Spring '08 term at University of Illinois, Urbana Champaign.

Page1 / 4

36UIUC%20FIN%20300%20Stock%20Index%20Futures%20Hedge%20Ratio%20%28Answers%29%20FA%2010%20SP10%20v3.1

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online