On February 15, a securities analyst recommended Universal Images’s stock as a good purchase in the early summer. The portfolio manager plans to buy 30,000 shares of the stock on June 15 but is concerned that the market, as a whole, will be bullish over the next four months. Universal Images’s stock is currently $30.28 and the beta is 1.25. Construct a hedge that will protect against movements in the stock market, as a whole. Use the August stock index futures which is priced at $352.40 on February 15 and has a $250 multiplier. Evaluate the outcome of the hedge if, on June 15, the futures price is $361.50 and Universal Images’s stock price is $39.25.
e. On February 15, how much is one futures contract worth? How many futures contracts are needed (round up)? Do you buy or sell the futures contracts?
f. On June 15, does the firm buy or sell the futures contracts? How much is one futures contract worth?
g. Is there is a gain or loss on the futures contract? If so, how much is the gain or loss on all the contracts combined?
h. What was the net additional cost of the stock? What was the effective cost of the stock purchase (stock and futures contracts combined)?
i. How effective was the hedge (i.e. how much did the hedge reduce the stock purchase, if at all)? Please state your answer in percentage terms?