Assume the OBX-index level is currently 875 and that the continuously compounded
ID: 2728893 • Letter: A
Question
Assume the OBX-index level is currently 875 and that the continuously compounded return on a 1-year, NOK-denominated T-bill is 4.75%. You wish to eliminate to the extent possible the risk of your NOK-denominated portfolio that is currently worth NOK 795,454. The portfolio has a bets of 1.10 with the OBX-index, and the correlation between the portfolio and the OBX is estimated to 1.00. Assume the multiplier applied to OBX-traded futures contracts is 250. (a) What is the 1-year futures price for the OBX-index futures contract assuming that zero dividends are being paid? (b) Should you hedge by going long or short OBX-index futures contracts? Briefly explain! How many futures contract are needed currently to fully hedge your portfolio?Explanation / Answer
a)futures price=s*e^rt
s= spot price r=risk free rate t=no of years
s=875 r=4.75% t=1 year
s=875*e^(4.75%*1)
=917.57
b)we have to go long as we can see that futures price is going to be high and to minimize our loses we should go long on it
no of futures contract required= beta*(asset value/ no of contracts)
=1.1*(795454/250)=3500 contratcs