A fund manager currently holds a well-diversified portfolio of Australian shares valued at $250000000

Posted: January 10th, 2022

A fund manager currently holds a well-diversified portfolio of Australian shares valued at $250000000. The global political context is unstable and the fund manager anticipates a period of unusually high market volatility. The S&P/ASX 200 VIX currently stands at 22. The S&P/ASX 200 Index stands at 6500.

(a) Explain how the manager can use VIX futures to hedge exposure to the anticipated volatility.

(b) Determine the net valuation of the strategy if the position is closed out when the S&P/ASX 200 Index stands at 5700 and the corresponding VIX stands at 38. (LO 19.5)