The margin requirement on the S&P 500 futures contract is 10%, and the stock index is currently 1,200. Each contract has a multiplier of $250. How much margin must be put up for each contract sold? If the futures price falls by 1% to 1,188, what will happen to the margin account of an investor who holds one contract? What will be the investor’s percentage return based on the amount put up as margin?
Cash in margin account = $27,000
Percentage return = -10%
The dollar value of the index = $250 x 1200 = $300,000
Required Margin = Dollar Value of Index x Margin Rate
= $300,000 x 10%
Futures price after the fall = $1188 hence the decline = $12
Decrease in margin account = $12 x $250 = $3,000
Therefore, the cash in margin account = $30,000 - $3000 = $27,000
Percentage return = Decrease in Margin Account/Margin Paid
=-$3,000 / $30,000
Use the following case in answering Problems 10 – 15 :
Mark Washington, CFA, is an analyst with BIC. One year ago, BIC analysts predicted that the U.S. equity market would most likely experience a slight downturn and suggested delta-hedging the BIC portfolio.
As predicted, the U.S. equity markets did indeed experience a downturn of approximately 4% over a 12-month period. However, portfolio performance for BIC was disappointing, lagging its peer group by nearly 10%. Washington has been told to review the options strategy to determine why the hedged portfolio did not perform as expected.
BIC owns 51,750 shares of Smith & Oates. The shares are currently priced at $69. A call option on Smith & Oates with a strike price of $70 is selling at $3.50 and has a delta of .69. What is the number of call options necessary to create a delta-neutral hedge?
a. How should the parity condition (Equation 17.2) for stocks be modified for futures contracts on Treasury bonds? What should play the role of the dividend yield in that equation?
b. In an environment with an upward-sloping yield curve, should T-bond futures prices on more distant contracts be higher or lower than those on near-term contracts?
c. Confirm your intuition by examining Figure 17.1.
94% of StudySmarter users get better grades.Sign up for free