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I am struggling with the question below. Instructions: Solve the following problem.
Hi! I am struggling with the question below. All help is greatly appreciated!
Instructions: Solve the following problem. To receive credit, readers must be able to follow your logic and you must explain each step in detail. Please label each step, identify each equation and variable, and explain your answer.
The management of a mutual fund plans to sell a basket of stocks in three months. The stocks are similar to the S&P 500. It seeks protection against a decrease in the price of the stocks. The current price of the S&P 500 Index is $2352.40. The futures price of index is $2397.80. The number of shares to be hedged is 1,000, and the number of shares per futures contract is 100. Therefore, 10 contracts will be hedged.
1. Define the following:
- Hedge
- Speculation
- Futures contract
2. Describe in detail the hedge created by the mutual fund. That is, what action will the mutual fund take?
3. Describe the outcome of this hedge in detail if the price of the index is $2304.20 per share and the price of the futures contract is $2349.60 per share when the hedge is lifted.
4. Describe the outcome of this hedge in detail if the price of the index is $2392.50 per share and the price of the futures contract is $2437.90 per share when the hedge is lifted. Base your answer on the original information given, not your answer in 3 above.
