A fund manager currently manages a diversified Australian share portfolio valued at $250 million.

Posted: January 10th, 2022

A fund manager currently manages a diversified Australian share portfolio valued at $250 million. The manager decides to use the S&P/ASX 200 Index futures contract to manage an exposure to a forecast decline in share prices. The S&P/ASX 200 Index is currently at 5500. In threemonths’ time the S&P/ASX 200 is at 5150.

(a) Today: set up a hedging strategy to manage the risk exposure.

(b) In three months’ time: close out the open position.

(c) Show the net valuation effect of the hedging strategy. (LO 19.5)