Determine the value of the portfolio

Reference no: EM131290754

The manager of a $20 million portfolio of domestic stocks with a beta of 1.10 would like to begin diversifying internationally. He would like to sell $5 million of domestic stock and purchase $5 million of foreign stock. He learns that he can do this using a futures contract on a foreign stock index. The index is denominated in dollars, thereby eliminating any currency risk. He would like the beta of the new foreign asset class to be 1.05. The domestic stock index futures contract is priced at $250,000 and can be assumed to have a beta of 1.0. The foreign stock index futures contract is priced at $150,000 and can also be assumed to have a beta of 1.0.

a. Determine the number of contracts he would need to trade of each type of futures in order to achieve this objective.

b. Determine the value of the portfolio if the domestic stock increases by 2 percent, the domestic stock futures contract increases by 1.8 percent, the foreign stock increases by 1.2 percent, and the foreign stock futures contract increases by 1.4 percent.

Reference no: EM131290754

Questions Cloud

Calculate the income elasticity of demand : Calculate the income elasticity of demand ηI. Are vegetables inferior goods and calculate the optimal prices in each market - What would be the profit of the XOCOLAT FACTORY if it decided to engage in price discrimination?

Create a default and parameterized constructor : Create a default and parameterized constructor. Create sets/gets for all instance variables. Create a get method to calculate and return the profit or loss. This would be calculated as Number of shares * (current price - purchase price).

Characteristics of a successful manager detail : A personal experience you had with a manager that exemplified or struggle with one of the characteristics of a successful manager detail by your peers.

Create a presentation that discuss the business idea : Create a PowerPoint presentation to include the following information: Title slide to include the name of the business and your name. One or two slides to discuss the business idea.

Determine the value of the portfolio : Determine the value of the portfolio if the domestic stock increases by 2 percent, the domestic stock futures contract increases by 1.8 percent, the foreign stock increases by 1.2 percent, and the foreign stock futures contract increases by 1.4 pe..

Determine the overall profit from the transaction : Determine the overall profit from the transaction. Then break down the profit into the amount earned solely from the performance of the stock, the loss or gain from the currency change while holding the stock, and the loss or gain on the futures t..

Person call for owning no common stocks : Financial advisers often contend that elderly people should invest their portfolios more conservatively than younger people. Should a conservative investment policy for an elderly person call for owning no common stocks? Discuss the reasons for ..

What mindset does an analyst need to work on such approach : What mindset does an analyst need to work on such an approach? Your description should end with the analyst team and by discussing the support plan for the system and what this will entail.

Identify the appropriate contract expiration : For each of the following hedge termination dates, identify the appropriate contract expiration. Assume the available expiration months are March, June, September, and December.

User Account

All Pages