On 31 October 2012 DGC Investment Ltd purchased a well-diversified portfolio of shares that it is intending to sell in 3 months time.To hedge against the adverse movements in price of these shares,on the same date,the manager obtained four 'sell' contracts with DSI Futures.A deposit of $20 000 was required by the broker for the futures contract.A standard futures contract is $25 per basis point.On 31 January 2013,DGC Investment Ltd sold the portfolio and 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 financial effect of the above transactions on the statement of comprehensive income of DGC Investment Ltd for the reporting period ending 31 December 2012?
A) decrease by $5000
B) decrease by $15 000
C) increase by $5000
D) increase by $10 000

Question

On 31 October 2012 DGC Investment Ltd purchased a well-diversified portfolio of shares that it is intending to sell in 3 months time.To hedge against the adverse movements in price of these shares,on the same date,the manager obtained four 'sell' contracts with DSI Futures.A deposit of $20 000 was required by the broker for the futures contract.A standard futures contract is $25 per basis point.On 31 January 2013,DGC Investment Ltd sold the portfolio and 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 financial effect of the above transactions on the statement of comprehensive income of DGC Investment Ltd for the reporting period ending 31 December 2012?
A) decrease by $5000
B) decrease by $15 000
C) increase by $5000
D) increase by $10 000

Quizplus · Accepted Answer

The decrease in the fair value of the share portfolio from $350,000 to $335,000 is a loss of $15,000. However, the futures price decreased from 3700 to 3600, resulting in a gain of 100 basis points per contract. With four contracts at $25 per basis point, the gain is $10,000. The net effect is a $5,000 increase in income.

On 31 October 2012 DGC Investment Ltd Purchased a Well-Diversified