V.8:12 (450-452): SIDEBAR: CALCULATING PREMIUM FAIR VALUE
Product Description
SIDEBAR: CALCULATING PREMIUM FAIR VALUE
A risk-averse investor wants to invest in the stock market. How does he do it without risking loss? He can borrow funds, buy a portfolio of stocks equivalent to the S&P 500 index at the price of S and simultaneously sell a S&P futures contract at a price of F. He has achieved a hedged position that is totally riskless, any depreciation in stock prices being compensated by a decrease in the value of the futures he sold.
A risk-averse investor wants to invest in the stock market. How does he do it without risking loss? He can borrow funds, buy a portfolio of stocks equivalent to the S&P 500 index at the price of S and simultaneously sell a S&P futures contract at a price of F. He has achieved a hedged position that is totally riskless, any depreciation in stock prices being compensated by a decrease in the value of the futures he sold.
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