Investments, tenth edition

In General 

(Per Unit of the Index)

Our Numbers

1.  Profits from contract

S 

T

 2 F

0

$100,000(S 

T

 2 1,414)

2.  Face value of T-bills

F

0

  

  

141,400,000

      TOTAL

S

 T

100,000S 

T

The total payoff on the contract maturity date is exactly proportional to the value of 

the stock index. In other words, adopting this portfolio strategy is equivalent to hold-

ing the stock index itself, aside from the issue of interim dividend distributions and tax 

treatment. 

 The market timing strategy of Example 23.3 also can be achieved by an investor who holds an indexed 

stock portfolio and “synthetically exits” the position using futures if and when he turns pessimistic con-

cerning the market. Suppose the investor holds $140 million of stock. What futures position added to the 

stock holdings would create a synthetic T-bill exposure when he is bearish on the market? Confirm that 

the profits are effectively risk-free using a table like that in Example 23.3. 

 CONCEPT CHECK