37 lines
2.8 KiB
Plaintext
37 lines
2.8 KiB
Plaintext
Chapter 29: Introduction to Index Option Products and Futures 507
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let us look at a simple example of how one might hedge a stock portfolio with stock
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index futures.
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Example: Suppose that a stock mutual fund operates under the philosophy that
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investors cannot outperform a bullish market, so the best investment strategy when
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one is bullish is just to "buy the market." That is, this mutual fund actually buys all
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the stocks in the Standard & Poor's 500 Index and holds them.
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If the manager of this fund turns bearish, he would want to sell out his positions.
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However, the commission costs for liquidating the entire portfolio would be large.
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Also, the act of selling so much stock might actually depress the market, thereby
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devaluing the remainder of his portfolio before he can sell it.
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This manager might sell S&P 500 futures against his portfolio instead of selling
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his stocks. Such a futures contract would move up or down in line with the S&P 500
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Index as it rises or falls. Suppose that he sold enough futures to hedge the entire dol
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lar value of his stock portfolio. Then, even if the stock market declined, his futures
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contracts would decline also and would theoretically prevent him from having a loss.
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Of course, he couldn't make much of a gain if the market went up, since the futures
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would then lose money. What this money manager has accomplished is that he has
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effectively sold his stock portfolio without incurring stock commission costs (futures
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commissions are normally quite small).
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If he turns bullish again at some later date, he can buy the futures back, and
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have his long stocks free to profit if the market rises. Again, he does not spend the
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stock commission nor does he have to go through the tedious process of placing 500
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stock orders to "buy" the S&P 500 - he merely places one order in futures contracts.
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Futures contracts often trade at premiums to the underlying commodity, due to
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the fact that the investor who buys the future does not have to spend the money that
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one who buys all the stocks would have to spend. Thus, he saves the carrying costs
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but forsakes any dividends. This savings is reflected by the marketplace in that a pre
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mium is placed on the price of the futures contract. As a consequence, longer-term
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contracts trade at a larger premium than do near-term contracts, much as is the case
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with options. In most cases, however, the index futures trader is concerned with the
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nearest-term contract, and perhaps the next one out in time.
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TERMS OF THE CONTRACT
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There are cash-based index futures on several indices, although some of these futures
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contracts are not heavily traded. The most heavily traded contract is the future on the
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S&P 500 Index. This contract trades on the Chicago Mercantile Exchange. It has con
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tracts that expire every 3 months (March, June, September, December) and a 1-point |