Question

Discussion 1

Futures Contracts
Discuss some of the ways a portfolio manager or investor can use futures contracts to maximize the value of the portfolio. Answer the following questions, providing explanations as needed:

•What is the difference between instruments traded over an organized exchange, and those negotiated between the participants?
•What downside risk is there to ongoing margin calls with a futures contract?
•Can one establish something other than a direct long or short futures position?

Discussion 2

Risk Free Rate
Four factors affect the value of a futures contract on a stock index—three of which are:

1.The current price of the stock index.
2.The time remaining until the contract maturity date.
3.And the dividends on the stock index.
Identify the fourth factor and explain how and why changes in this factor affect the value of the futures contract.

Discussion 3

Global Investing
Discuss four factors that lead U.S. investors to consider including global securities in their portfolios. Indicate both the pros and cons of using this strategy.

Response Guidelines
Based on the original post of at least two other learners, answer the following questions:

•What is political risk?
•Do all foreign markets enjoy the same liquidity?
•How does non-correlated factor in the selection of global securities?

Discussion 4

Application of Concepts
To help identify opportunities to apply course concepts, skills, and strategies to your work environment or personal investing objectives, answer the following questions, providing explanations as needed:

•Are the net incomes on all foreign companies constructed as they are in the U.S.?
•What differences do the accounting variances in foreign companies have on profits and overall returns?
•What impact does currency differences have on investment performance?

Solution Preview

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Discussion 1

An investor can use futures contract to hedge the risk associated with the portfolio and stabilize the returns of the portfolio. As an example, we can consider the simple case of an investor who has $2 million invested in the equity markets. The investor is concerned that a decline in the equity markets can have an adverse impact on the value of the portfolio. Therefore a short position in the futures market can be taken in which the short position would gain value as the value of equities decline. Therefore, the downside in the equity position can be countered by the upside in the derivatives position...

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