Case study of Orion Financial Management - Portfolio Management?

Maria Gilbert is a principal in the company of Orion Financial Management. For 20 years she was chief investment officer along with Reliance Investments, the pension management arm of the Second National Bank of South Bend, Indiana. She left the bank in May year 1995 in an effort to turn her expertise into greater personal rewards.

Two portfolios within management for medium-sized pension funds were on the top of her current agenda. The first portfolio was an index fund denoting a cross section of the S&P 500 stocks. This portfolio had been recognized like a core portfolio for the South Bend Firefighters, currently$10 million. The 2nd portfolio was an keenly managed fund for the Ryan Country Public Employees Retirement Fund that aggregated $2.75million.

The firefighters portfolio was situate in a cross section of S&P 500 stocks on December 23 year1995, while the S&P 500 Index was at 500. One year later, on December 20 year 1996, the S & P 500 Index closed at 595. On similar day the S & P 500 March/1997 future contract closed at 600. The March/600 call on the S&P 500 Index carried a premium of 18.75 points, and the March/600 put was at 8.50. The Ryan Country fund was due as follows: cash equivalents, 9 percent; fixed income securities, 36 percent; equities, 55 percent. Treasury bond future were priced at 95.

On December 29 of year 1996, Maria arrived at the office ascertained to adjust these two portfolios. Though, she had mixed feelings about the stock market. On the one hand, she observed the market might carry on its advance from and S&P 500 level of 595 to an index level of 640 throughout the next three months if corporate profits continued there upward surge. Alternatively, she concerned that a downward correction could take the market to 545 if interest rates moved harshly higher as few were predicting. After pondering her choices she decided to look more intimately at substitute methods for both funds, ignoring taxes and transaction costs for simplification of her task.

Questions

1. Assume Gilbert thought the stock market would weaken and she wanted to lighten, though not eliminate her equity position and raise the fixed income part of the Ryan portfolio. Point out specific actions she could obtain in futures markets to shift the allocation of the Ryan portfolio to zero cash, $1.6 million fixed-income, and $1.15 million equities.

2. Are the S & P 500 March stock index futures quite priced on December 20, year 1996? Describe (Yields: Treasury-bills, 8 percent: S&P 500, 4 percent).