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Essentials Of Investments
Found in: Page 592
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

Short Answer

Janice Delsing, a U.S.-based portfolio manager, manages an $800 million portfolio ($600 million in stocks and $200 million in bonds). In reaction to anticipated short-term market events, Delsing wishes to adjust the allocation to 50% stocks and 50% bonds through the use of futures. Her position will be held only until “the time is right to restore the original asset allocation.” Delsing determines a financial futures-based asset allocation strategy is appropriate. The stock futures index multiplier is $250, and the denomination

of the bond futures contract is $100,000. Other information relevant to a futures-based strategy is given in the following exhibit:

a. Describe the financial futures-based strategy needed, and explain how the strategy allows Delsing to implement her allocation adjustment. No calculations are necessary.

b. Compute the number of each of the following needed to implement Delsing’s asset allocation strategy:

i. Bond futures contracts.

ii. Stock-index futures contracts.

a. As below

b. i) 1022 ii) 581.

See the step by step solution

Step by Step Solution

Step 1: Definition of interest rate SWAP and obligations ‘a’

She should sell stock index futures contract and buy bond futures contract. This is likely to provide same exposure as buying the bonds and selling the stocks.

This strategy assumes high correlation between movements of bond future - bond portfolio and index futures – stock portfolio.

Step 2: Calculation of number of contracts ‘b’

i. Total no. of contracts = Duration x Stocks x Change in yield

= 5 x $200,000,000 x .0001

= $100,000

Number of contracts = Total no. contracts / PVBP of Bonds Future

= $100,000 / 97.85

=1,022 contracts

ii. Number of contracts = Stocks / (stock index futures price x multiplier

= $600,000,000 / ($1,378 x 250)

= 1,742 contracts

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