Let S(0) = 100 and let the risk-free rate be constant at r = 5% compounded quarterly.
Suppose you wish to BUY 100 stocks after 1 year.
To hedge against risk, you decided to enter into 500 “futures’ contract on the stock with same Maturity.
Assume that there is no initial margin or maintenance margin for this hedging exercise.
Assume that Marking To Market (M2M) takes place once a quarter.
The payments resulting from Marking To Market are invested (or borrowed) at the risk- free rate.
Assume the stock prices at the end of each quarter are: S(0.25) = 105, S(0.5) = 108, S(0.75) = 103, and S(1) = 110
Calculate the Net Financial Impact of Buying the 100 stocks and the hedging with futures.