On 31 October 2012 Gordon Investment Ltd has a well diversified portfolio of shares that it is intending to sell in 3 months time.To hedge against the adverse movements in the price of these shares,the manager obtained four 'sell' contracts with DSI Futures.A deposit of $20 000 was required by the broker.A standard futures contract is $25 per basis point.On 31 January 2013,Gordon Investment Ltd closed out all four contracts.The following information is provided. $$\begin{array} { | l | l | l | l | }
\hline & 31 \text { October 2012 } & \text { 31 December 2012 } & 31 \text { January } 2013 \
\hline \text { Fair value–share portfolio } & \$ 350000 & \$ 335000 & \$ 330000 \
\hline \text { January 2013 DSI Futures price } & 3700 & 3600 & 3500 \
\hline
\end{array}$$ What is the fair value of the futures contract on 31 December 2012 and the cash received from DSI Futures on 31 January 2013 respectively?
A) ($5000); $370 000
B) ($5000; $40 000
C) $10 000; $370 000
D) $10 000; $40 000

Question

On 31 October 2012 Gordon Investment Ltd has a well diversified portfolio of shares that it is intending to sell in 3 months time.To hedge against the adverse movements in the price of these shares,the manager obtained four 'sell' contracts with DSI Futures.A deposit of $20 000 was required by the broker.A standard futures contract is $25 per basis point.On 31 January 2013,Gordon Investment Ltd closed out all four contracts.The following information is provided. $$\begin{array} { | l | l | l | l | } 
\hline & 31 \text { October 2012 } & \text { 31 December 2012 } & 31 \text { January } 2013 \
\hline \text { Fair value–share portfolio } & \$ 350000 & \$ 335000 & \$ 330000 \
\hline \text { January 2013 DSI Futures price } & 3700 & 3600 & 3500 \
\hline
\end{array}$$ What is the fair value of the futures contract on 31 December 2012 and the cash received from DSI Futures on 31 January 2013 respectively?
A) ($5000); $370 000
B) ($5000; $40 000
C) $10 000; $370 000
D) $10 000; $40 000

Quizplus · Accepted Answer

The fair value of the futures contract on 31 December 2012 is calculated based on the change in the futures price from the initial date (31 October 2012) to 31 December 2012. The initial futures price was 3700, and on 31 December 2012, it was 3600. The change is 100 basis points. Since each contract is $25 per basis point, and there are four contracts, the fair value change is 100 * $25 * 4 = $10,000.The cash received from DSI Futures on 31 January 2013 is calculated based on the change in the futures price from the initial date (31 October 2012) to 31 January 2013. The initial futures price was 3700, and on 31 January 2013, it was 3500. The change is 200 basis points. Since each contract is $25 per basis point, and there are four contracts, the cash received is 200 * $25 * 4 = $20,000. However, the question seems to have a discrepancy in the calculation or the options provided. Based on the provided calculation method, the cash received should be $20,000, but this option is not available. The closest correct option based on the calculation method provided is D) $10,000; $40,000, assuming there might be a misunderstanding in the question's details or a typographical error in the options.

On 31 October 2012 Gordon Investment Ltd Has a Well