Explain what does it mean to volatility hedge

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Reference no: EM133497037

Question: The S&P/ASX 200 Index (ie the physical market) is trading at 7315.202. Price the September SPI200 futures contract, which has 86 days to expiry, when the continuously compounded risk free rate of return is 3.5850%, the dividend yield on the S&P/ASX 200 Index is 4.15%pa, and custody costs (ie the cost of holding physical shares) are 0.22%pa

How much profit or loss would you make if you went long 60 90-day bank bill futures contracts at 96.35 and closed them out 27 days later at 96.08 when the continuously compounded risk free rate is 3.5850%?

How much profit or loss would you make if you went short 13 20-year bond futures contracts at 94.795 and closed them out 45 days later at 94.745 when the continuously compounded risk free rate is 3.5850%?

A trader plans to make a profit from a yield spread flattening trade in bond futures, whereby the trader goes long 129 3-year bond futures contracts at 95.025 and correspondingly goes short 85 5-year bond futures contracts at 95.265. Seven days later, after the cash rate has been reduced to 3.45%pa, the trader unwinds the trades in the 3-year bond futures contract at 94.975 and unwinds the trades in the 5-year bond futures contracts at 95.315. What was the trader's profit or loss on this trade?

In question 1d) the spread trade involved 129 3-year bond futures contracts against 85 5-year bond futures contracts, a ratio of 1.52:1 to be volatility hedged.

What does it mean to volatility hedge?

Explain, in detail, the process to properly determine the appropriate volatility hedge?

Reference no: EM133497037

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