Here is information for the mini-S&P 500 futures contract. A…
Here is information for the mini-S&P 500 futures contract. A portfolio manager wants to use this futures contract to hedge a $200 million diversified stock portfolio that mirrors the S&P 500 to hedge against a decline in the value of the S&P 500. You have the following information: Contract multiplier: 50 Price of the futures contract at the time the hedge is placed: 4,200 a. What is the optimal number of futures contracts that the portfolio manager should take? Be sure to indicate if it is to buy or sell the futures contract. b. Suppose at the delivery date, the value of the S&P 500 is 3,800. Show what the outcome for this hedge will be.
Read DetailsThe observed 5-year CDS spread for Country X is 800 basis po…
The observed 5-year CDS spread for Country X is 800 basis points (bps).a. Assuming a recovery rate of 40%, calculate the implied probability of default for Country X. Show your work.b. Now assume the recovery rate is 60% instead. Calculate the new implied probability of default. Show your work.c. Explain intuitively why the implied probability of default changes when the recovery rate changes.
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