Total value of futures contracts

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A superfund manager currently manages a diversified Australian shares portfolio with a value of $300 million. The manager decides to use the ASX SPI 200 index futures to hedge a forecasted decline in share prices. As an analyst in the team, you have calculated that the share portfolio requires 2100 futures contracts to manage the risk exposure. Assuming S&P/ASX 200 index is currently at $5,500 and one index point is $25.

(i) Explain to your manager the action your team should take in futures contracts and the total value of futures contracts

(ii) In three months time, the manager decides to close out the hedging position. Assuming the S&P/ASX 200 index is at $5,150at that time. Explain how you will close out the open position and show the net valuation effect of the hedging strategy.

Reference no: EM133072836

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