Hedging With Stock Index Futures Case Study Options, Futures and Risk Managements Accounting Assignment Help

Assignment Task

SCENARIO : HEDGING WITH STOCK INDEX FUTURES
March 2020 saw one of the most dramatic stock market crashes in history, which was caused by governments’ reactions to a COVID-19 outbreak (e.g. strict quarantines, lockdown of populations and the shut-down of the bulk of business activities). While there was rapid declines in stock prices for the great majority of industries, many sectors were in a position of strength, such as healthcare, consumer staples and information technology. The best industry performers yielded a positive monthly return of over 20% (Mazur et al., 2021). One of your long-term clients, Mr Johnathan Dobek, constructed a  stock portfolio on 30th January 2020 and intended to sell the portfolio on 18th June 2021. His portfolio consists of any four U.S. stocks (among nine stocks listed in Exhibit 1) plus Pfizer, Inc. (PFE) stock. Mr Johnathan was concerned about the spread of the new coronavirus outbreak and how badly coronavirus would hurt the U.S. stock market. However, he was confident that the stocks in his portfolio would outperform the market. Therefore, on 2 July 2020, he asked you to set up a hedge against his portfolio’s market risk using CME E-Mini S&P500 index futures. He expected the hedge to be in effect at the close of trading on 2 nd July 2020. The futures contract prices are presented in Exhibit 2, while the contract size of all futures is $USD50 per index point
 

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