You hold a portfolio of stocks with a value of $1,000,000. You expect that you will be selling the stocks in the portfolio in one year. You are considering hedging your market risk by using the 1-yr S&P 500 Index Future. The price of the future is currently at 2,000. The multiplier for the future is 250; the margin requirement is 10% of the total futures position.
What side of the futures position will you take? Long or short, and why? How many contracts will you use?
What is your initial cash flow?
If the price of the futures falls to 1,900, what will happen to your margin account?
If, in exactly one year, the futures contract is trading at 1,800 and your stock portfolio has fallen in value by 10%, what will be your overall profit?