Séance 2: Index, Pricing Contracts

Question 1

1. What is one of the primary advantages of trading index futures over directly purchasing stocks?

Answer 1

It Allow lower transaction cost making them efficient for trading a large amount of assets.

Question 2

2. Why are Index futures are often preferred for timing or allocation strategies?

Answer 2

They are quicker to trade, so fast exposure to the market

Question 3

3.What is one of the advantage that index futures do not have over direct stock purchases?

Answer 3

You can trade index futures with lower cost of transaction. They are quicker to trade so fast exposure to the market

-> But do not guarrentee profit. Because you are betting on the price.

Question 4

4. Why might an investor choose to use index futures rather than purchasing a basket of
   individual stocks?

Answer 4

Index future allows them to participate in a broad market without buying large amounts of stocks.

Question 5

How to calculate the beta portfolio of a portfolio.

Answer 5

Is to calculate the pourcentage of different stocks you have * the beta of the corresponding stock.

Exemple:
Portfolio A consists of 60% of Stock A with a beta of 1.2 and 40% of Stock B with a beta of 0.8.
Portfolio beta = (0.60 * 1.2) + (0.40 * 0.8) = 1.04.

Question 6

Explain for each beta portfolio:
- Beta portfolio of 1.0
- Beta portfolio greater than 1.0
- Beta portfolio lower than 1.0

Answer 6

• Beta portfolio of 1.0: It means that the beta portfolio is in perfect corrolation with the rate of the market. ex: Market goes up by 1% the portfolio goes up for 3% for every assets.
• Beta portfolio greater than 1.0. It means that the portfolio is more sensitive and more volitile than the rate of the market. Ex: If I have a Portfolio of a beta of 1,5 and the market goes up by 3% it means that the portfolio goes up by 4,5%. So 50% (4,5 /3 *100) more votality.
• Beta portfolio lower than 1.0. It means that the portfolio is less sensitive and less volatile to the rate of the market.
  Ex: If i have a portfolio of beta of 9.0 and market rate goes down by 3% it means it that the portfolio goes down by 2,7% which means 10% less volatile.

Question 7

6. What is the primary reason for using index futures contracts to hedge a portfolio?

Answer 7

They offer a less costly and quicker way to protect against a decline of price stocks

Question 8

7. How do you determine the hedge ratio when using index futures to hedge a portfolio?

Answer 8

By using the portfolio’s beta to adjust the number of futures contracts

Question 9

8. What is the role of beta in a portfolio when hedging with futures contracts?

Answer 9

Beta is used to adjust the number of portfolio needed to hedge the porlfolio’s market exposure

Question 10

9. Why might an investor use index futures contracts instead of selling the stocks in their
   portfolio during a market downturn?

Answer 10

. It avoids transaction costs and delays associated with selling the underlying stocks.